Candlestick Trading Blog
July 29, 2008
Intraday Trading
Intraday Trading and Gap Trading Strategies Intraday trading is defined by the SEC as trading that refers to opening and closing a position in a security on the stock market in the same trading day. This can include buying and selling done in order to capitalize on a potential rise in a security’s value or shorting and covering the short to capitalize on a potential drop in value. Intraday traders borrow money by using leverage or margin to capitalize on small moves in the value of a security. Intraday traders should be very strict about cutting their losses by utilizing stop loss orders so that they limit the potential downside for a trade. Intraday trading, often used interchangeably with the term day trading, requires the knowledge and use of technical analysis. Intraday trading also requires the knowledge and use of gap trading strategies and gap analysis. Gap trading is one of the strategies used to buy stock and short stock. A gap is a change in price levels between the close and open of two consecutive days and the purpose of using gap strategies is to find stocks that have a price gap from the previous close and watch the first hour of trading to identify the trading range. Through identifying the trading range, investors can decide whether or not to either buy or short stocks when intraday trading. There are eight gap strategies used in intraday trading. There are four full gap strategies and four partial gap strategies and each has a long and short trading signal which are discussed below. 1) Full Gap Up: Long – The stock’s opening price may be greater than yesterday’s high, so in this instance the trader would revisit the 1-minute chart after 10:30 a.m. and they would set a long (buy) stop two ticks above the high achieved in the first hour of trading. 2) Full Gap Up: Short – This stocks gaps up, but there is not enough buying pressure to sustain the price, then the stock price will either level off or drop below the opening gap price. In this situation investors would set a short stop equal to two ticks below the low achieved in the first hour of stock trading. 3) Full Gap Down: Long – This occurs when the price below the previous day’s close, but the low of the day before as well. In this instance investors should set a long stop equal to two ticks more than yesterday’s low when intraday trading. This can occur due to poor earnings or other bad news and causes the stocks price to drop a lot more than normal. 4) Full Gap Down: Short – In this instance investors should set a short stop equal to two sticks below the low achieved in the first hour of trading stocks. 5) Partial Gap Up: Long – This occurs when the opening price is greater than yesterday’s close, but it is not greater than yesterday’s high. Investors should stop two ticks above the high achieved in the first hour of trading just as they would with full gaps. 6) Partial Gap Up: Short – This is the same as for the full gaps and the successful trader should set a short stop two ticks below the low achieved in the first hour of intraday trading. 7) Partial Gap Down: Long – If the stock’s opening price is less than yesterday’s close then the investor should set a buy stop two ticks above the high achieved within the first hour of trading. 8) Partial Gap Down: Short – In this situation investors should set a short stop equal to two ticks less than the low achieved if a stocks opening price is less than yesterday’s close, within the first hour of trading. The main difference between a full and partial gap, when intraday trading, is the risk and the potential gain. When a stock gaps completely above the previous day’s high it has significant change and the demand is large enough so that the markets are forced to make a major price change to accommodate unfilled orders. Full gapping stocks require that the stocks trend farther in one direction than stocks that only partially gap. When implementing a stock trading plan, investors should know that typically there is a greater opportunity for gain over several days in full gapping stocks. Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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