how to avoid loss from gap up/down ?

megapixel

Well-Known Member
#1
Is there any way to stop loss from gap up or gap down ?


For example: see this chart ....a shorting guy will get a heart attack for this sudden gap up when he opens terminal at 9.15 AM and find this gap up.



how to avoid loss here ?
 

columbus

Well-Known Member
#2
Is there any way to stop loss from gap up or gap down ?


For example: see this chart ....a shorting guy will get a heart attack for this sudden gap up when he opens terminal at 9.15 AM and find this gap up.



how to avoid loss here ?
Hi megapixel,

No way.

To add salt to injury ,you will find the initial candles a BIGGER one.

If you are in the trend ,you will be happy and book profit immediately. Otherwise
wait till 9.30AM ,because you will find many times small retracement.
 
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Reggie

Well-Known Member
#4
Megapixel,

Gaps are a part of a trader's life, especially if you carry over positions to the next day, it cannot be avoided. But Gaps are not to be feared, as the gaps for or against should cancell out each other or should generally be in your favour as there is a reason you holding a long/short position (presuming you are trading with the trend).

Having said that, there are ways to reduce the impact of gaps being against you.

For e.g you are long futures and say the stock opens 1.5% lower, without any reason. This would mean that your position is approx. 4K in the red. The best thing to do is to not panic, but to watch the screen for 5 minutes atleast.
It is quite likely that the opening 5 minutes are meant to shake off weak hands, and force them to sell. Opposite is true if you are short, Gap up open and the first 5 minutes of trading is designed to trigger SL.

It is likely that the stock will recover to its original trend within the next 10-30 minutes.

However, if the gap open is because of -ve news pertaining to the company, I think it is better to take the loss in the stride, but not panic but still wait and watch to see how the stock reacts. You would have noted that stock that open with deep gaps, even 10-20% recover their losses and even turn positive.

For e.g on Fri. 26th Oct. CESC (Due to takeover of Firstsource) opened at 300.10 and made a low of 283 in the first minute. Any panic trade would have meant a loss of 17K. However, within 5 minutes of trade, it recovered to 99.50allowing a decent exit to a trader.

My two bits worth...

QUOTE=megapixel;735644]Is there any way to stop loss from gap up or gap down ?


For example: see this chart ....a shorting guy will get a heart attack for this sudden gap up when he opens terminal at 9.15 AM and find this gap up.



how to avoid loss here ?[/QUOTE]
 

Anillal

Active Member
#5
@megapixel
First such wide gaps rarely occur and one has to take it in stride as one takes in stride the chance of getting involved in a serious accident while driving. Second, being concerned of gaps so as to ask the above question itself suggests one is not a positional or swing trader but either a newbie daytrader or a control freak or has exceeded one's risk taking capacity or is being plain greedy or pushing the luck on a news or hunch. Howsoever the case, the above couple of suggestion to compensate the gap opening are what could be called the cures. The best method is always preventive method which is to have a rule to liquidate in profit or loss position at the close of a day no matter what. One can always enter the trade again next day by paying a nominal charge of brokerage STT etc. which is a very small price to pay for having a good night sleep. :)
 

hames

Active Member
#6
@megapixel

Most of the time gap up will happen during uptrend and gap down will happen during downtrend OR when the trend is about to reverse, gap down will happen after strong uptrend and gap up will happen after strong down trend. so to stick with the trend. technical indicators would be useful for the same.

This is my observation leaving apart news based events.
 

DanPickUp

Well-Known Member
#7
How to avoid such situations:

If you really want to keep overnight positions: Hedge your position at the end of the day. That is the only way to avoid such situations (or losses) as you not can trade pre and after market hours in Inida.

The other question then would be: How to handle such situations when in loss, but that is an other subject. Here you will have to go into strategy trading which will get quit complex when having to recover bigger losses.

Good trading

DanPickUp
 

megapixel

Well-Known Member
#8
Here is a chart:



There is no gap in this chart ...... but sometimes you may notice spikes in the chart.

I'm not sure whether you call it a manipulation or not ....but this long candle is not normal.....and has a high closing price than others.

a trader might suffer loss if he buys the scrip with such high price and enter into position.

Are these long candles caused by institutional buyers ?
 

Reggie

Well-Known Member
#9
Megapixel,

Spikes in chart of the candle length shown can only be created by institutions in normal circumstances. Mostly you will notice these (spikes) candles last upto 15 minutes.

The way I trade them - If long, and the candle is in my favour, I will sell. If short, I wait 15 minutes to decide further course of action. Mostly these candles are created by institutions to throw off traders (for short to cover positions, longs, to sell)

My observation is that mostly the stocks move in direction of the main trend. The idea is to take advantage of these spikes, and one can fade if not in the trade as well. You are right that these spikes generally should not be bought. If the high of the spiked candle is not broken after 30 minutes, then it is o.k to enter the trade with appropriate stop loss.

Besides throwing off traders, I think these spikes are created by HFT and Algos to distort short term averages.

Here is a chart:



There is no gap in this chart ...... but sometimes you may notice spikes in the chart.

I'm not sure whether you call it a manipulation or not ....but this long candle is not normal.....and has a high closing price than others.

a trader might suffer loss if he buys the scrip with such high price and enter into position.

Are these long candles caused by institutional buyers ?
 

megapixel

Well-Known Member
#10
Re: how to avoid loss ?

Nowadays many small brokers are coming up with attractive brokerage plans. I'm worried about trade safety.

Suppose you shorted a future / option and your broker shuts down the business( due to bankruptcy/run away/some reason) some days later.

How do we close open positions in such odd scenario to avoid unlimited loss (assuming your trade is in loss) ? This is bit scary if the exit route also shuts down when broker is down.

do we have any exit routes in such situation ? Does NSE/SEBI has any guideline here ? Does the client suffer in these cases ? Also what are possible outcomes in such situations ? Please enlighten with facts.
 
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