AN "OPENING GAP" TACTIC

In cases where the markets are set to open up strongly, there will often be large gaps in the opening prices of certain stocks from the prior day's closing prices. This can provide profitable opportunities for day traders. The following sets out an easy to implement strategy or tactic that may be used to capitalize on these opportunities.

Suppose that, prior to the opening bell, indications are that the market will open up quite strongly. A large amount of buy orders for many stocks that have been placed prior to the market open will cause market makers to increase the price of such stocks at the commencement of trading. In many cases, the amount which the market maker opens or "gaps" up a particular stock will be higher than what is justified. This creates what is often referred to as a "Bull Trap".

In other words, the stock is sometimes opened up excessively high to entice investors to buy simply because the stock shows strength at the open.The setting up of a Bull Trap is the main reason why many stocks that gap up at the open tend to retreat back in price after the first hour or so of trading. Once the pre-market open buy orders have all been filled, the demand for these stocks often subsides.

There are exceptions, however, and these are what create some potentially profitable day trading opportunities. In particular, chances are good that if a stock thathas opened up is able to reach a new daily high after the first hour of trading, the strength shown at the open was real and not artificial because there has been additional and continued buying after the pre-market orders have been filled. This provides day traders the opportunity to use the following tactic or strategy:

1. Choose a Stock
Choose a stock that has opened by at least Re. 1.00 over the prior day's closing price.
2. Allow Trading for One Hour
Permit the stock to trade for the first hour after the market opens and monitor it closely.
3. Set the Alert
After the first hour, set an alert 1/4 point above the high of the day
If the stock in fact moves to a new daily high, the alert will be triggered and you should then immediately buy and, at the same time, place a stop loss sell order below days low.

Summary

This tactic or strategy provides day traders with a fair degree of profit potential. There is also limited down side risk because of the protective stop loss sell order.