Posted July 21, 2021
By Alan Knuckman
Mind The Gap!
Gaps can be maddening...
Whether the market plummets at the open or jumps up, a good percentage of traders start panicking. They’re either discouraged watching their portfolio go red or afraid of missing out on all the trades opening straight up.
I get it, it can be a frustrating feeling.
So what can you do when a market opens up significantly higher or lower than where it closed? This riddle haunts traders, but I have a solution that could help you succeed...
The cogs of the global markets are constantly turning, putting money in motion night and day, and overnight moves are now extremely common. It has become a rare occurrence for the stock market to be unchanged when the bell rings.
But be sure to keep in mind: Patience is an investor's greatest asset. Especially when opportunities come and go so quickly and frequently, another day is just hours away.
Gap openings can disrupt both leverage and risk for traders that get caught in the emotion of the first few minutes of the trading session.
So what can you do when the market gaps at the open?
- For starters, wait one hour... Monitor the market in that amateur hour with your hands down and away from the computer mouse or mobile device. Let the fear and greed play out amongst the market chasers who are more worried about missing out than making sound and logical decisions.
- Once that hour is up, analyze the market action. If new higher highs or lower lows are made after the open, the move could extend itself. Be cautious as the trend is already extended. Use the average trading range as a guide to measure more momentum potential.
- Look for the price gap to be filled. With a large opening hour, moving the risk reward may favor a price reversal to close that gap. The average trading range can give guidance that a market may have moved too far, too fast.
The worst-case scenario is to do nothing. If the risk reward is not favorable, then it may not be worth it to participate.
How much more upside is there to stocks opening 2% higher?
It costs nothing to sit tight!
Keep it In the Money,
Trading Tip of the Day: How’s That For Action?
Well, it’s certainly been an interesting week so far.
On Monday, the Dow saw a 2% drop on the day. The Nasdaq fell more than 1% and the S&P followed, finishing down about 1.6%.
Elsewhere, someone pulled the plug on crude. It settled lower by more than 7%.
It was all there. The VIX pop! The fear! The turmoil!
Then on Tuesday, it was almost like none of that even happened. At least, that’s the case for the major averages...
The Dow, S&P and Nasdaq all finished the day higher by about 1.8% each.
How’s that for action?
This all just goes to show that the market can move fast when it wants. A take away from this is to be careful during these moves so you don’t get caught on the wrong side of the trend.
Overtrading can be the downfall of many novice traders, and you don’t want to churn up your account chasing or panic selling.
Like Alan says, patience is key. So when the market is moving fast like this, maybe go grab a cup of coffee and come back to evaluate after the fireworks. You’ll probably save yourself a headache…