Friday, March 02, 2007

Dummy Trade of the Day - Transaction Systems Arch. (Public, NASDAQ:TSAI)

TSAI showed up on my unusual volume scan this morning. It had a huge gap down and carved out a WORB (wide opening range bar), a doji like candle with a tiny body. The second bar opened slightly higher and attempted to move towards the OR high but pulled back. The third stick opened higher again and as it moved towards the OR high, I knew that this was a gap fade setup. I entered long on a break of the OR high and plotted the Fibonacci retracement from yesterday's high to the OR low. TSAI moved slowly at first, but then started to pick nicely. As it approached the declining 10 period MA, it started to consolidate. I took a partial on a tag of the 50% retracement and exited the balance on weakness shortly thereafter. As it consolidated under the weight of MA, I noticed a small H&S top developing on the 5 minute timeframe. On a measured move basis, I estimated there was about 70 cents to be made on a break of the neckline, so I took the quick short scalp.

Tip - when the market gaps down wide on the open like yesterday and today, I don't run gapper scans. Instead I scan for unusual volume through my broker and Trade_Ideas. I use a short gapper list that I put together from the pre-market trade, Briefing.com etc. That, plus my usual suspects, usually gives me plenty of stocks to focus on without having to spend the extra time to sort through exceedingly long gapper scan lists.

8 comments:

Zoomie said...

Ah-ha, thanks for the that, makes sense. Today I didn't wait for the dust to settle before initiating a short position after the market gapped down. It cost me.

Rudedog said...

I went to 15 and 30 minute charts for the first time on Friday and I must say that it was less stressful than trading the 2 minute charts.

Question for you. Are you using limit orders or buy/sell stops to get in to the trade?

Thanks

croker said...

Hi! Newbie question, but I would have thought on a gap down that the stock would be shorted.. is it common for a 'gap fade' to happen like this? Is it simply that whether you have a gap up or down, you wait for the candles to show whether you will go long or short?

Jamie said...

Zoomie,
I guess that means that you changed the strategy from your usual 30 minute timeframe.

Jamie said...

Rudedog,

I usually use limit orders, but if I have more than two setups developing at the same time, I use buy/sell stop limit orders.

Jamie said...

Croker,

Good questions, but very difficult to answer without examples, so I'll try to keep it simple. For newbie's I would recommend trading gaps in the same direction as opposed to fading. The wider the gap, the longer it will take to setup a suitable entry. Wait of tag or near tag of the MA and then enter when price takes out the previous high(low). Master those setups first and then look to fading.

For fading, look for wider gaps. If a base and break pattern develops in the first hour of trade, you can fade the gap, keeping in mind that the MA will act as resistance, causing price to consolidate or reverse. So if the MA is not very far away, the risk/reward potential is limited.

Gap Fades are common when the market has a wide opening gap. Last week's increased market volatility was a perfect environment for gap fades. However, I do not fade gaps on an everyday basis.

A gap fade will generally require a wider stop which means higher risk or smaller size.

To answer the last part of your question, I will say that fading is more about feel and feel comes with experience. So again, if you are new to trading, it might be best to trade the gaps in the same direction as they open.

Rudedog said...

One more question, if I may. When you use a stop limit order, how far apart is your activation price and your limit price? Thanks.

(ps)You don't know how helpful your blog is, along with those of others that have a similar style of trading.

Jamie said...

Thanks Rudedog,

It depends on the spread, but assuming a highly liquid stock with no spread, 2-3 cents. I would never use a buy stop limit order on a stock GROW with a 15-20 cent spread. In a case like GROW I wait for the spread to narrow and hit the ask.