What Causes A Gap & Go?

When a market gaps up out of a trading range it confounds many traders. They do not understand how the price can gap up to a whole new trading range, stay there all day, and even go higher through the day. If the gap is out of an oversold level it is actually a high probability trade entry in most cases as a new trading range is established with the potential of a new uptrend beginning. If a gap up does not fill in the first hour and a half of trading the odds are it will just keep going in that direction for the remainder of the day. Shorting momentum is a bad idea in most cases and shorting a gap up is not a signal in most cases it is an opinion. Gap ups tend to work much better in long term up trends than in bear markets.

What causes these situations? They are generally psychological and not based on fundamental valuation changes:

There are only three positions a trader can hold on a gap up day: Short the position, holding it long, or flat and in cash.

The traders short positions will have a very strong desire to cover their shorts to stop the pain, this will increase as the day goes on. Shorts that have to cover due to being stopped out into the gap creates buying pressure pushing the market up yet farther.

The traders and investors long have no pressure to sell on the gap up day. They are happy with their positions and generally let the winner ride in most cases. There is no pressure coming from long positions being stopped out so this alleviates a lot of selling pressure. Only profit taking from this group creates selling pressure and they are under no real urgent pressure as they see their account grow.

Traders and investors on the side line in cash want in on any pull back. Professionals have under performance of the market as pressure and they need to chase and get positioned right so they have pressure to buy. Traders that are flat want to get on the profit bandwagon so they create even more buying pressure as they enter on any chance they get. Many will give up and chase by the end of the day as well.

This is what causes these types of gap and gos. Long are sitting tight creating no selling pressure, short are having to cover causing buying pressure, and people on the sidelines are wanting in causing dips to be bought and rallies out of weakness. Think about these dynamics next time you think “It just can’t go any higher.”

-Steve Burns...

How to get consistent Trading Profitability.

Trading is a war and there may be few battles which may get lost, losing a battle do not means you have lost the war. Trading is not about one day, one week, or even one year. Trading is about taking money out of the markets over and over again, consistently.

When I have bad days and series of losing streak in trading one thing which has helped me time and time again is  I look at my long term track record of my trading curve , and that gives me confidence in myself as a trader, and my trading methodology.

So if you want to make long term profitability as stock trader, and option trader, here are principles that will help you to be profitable in the long term as a trader.

·        Trade with the trend, Market is a irrational beast and it can keep going in a single direction so always try to be with the trend. As Humans emotions overpower you, as a trader you need to control your emotions in making your trading decisions.

·        Have a trading plan and trade as per your plan. Do your Homework before you begin trading.

·        Trade based on quantifiable facts, not your own emotions. Trader should react based on price action, not based on my feelings.

·        Trader should learn from other people’s experiences, instead of losing his own money and learning the hard way.

·        Trader should study historical charts of stocks/Index in different time frames, to know short, medium and long term trend. Always back tested your trading strategy before entering market.

·        Trader should develop a trading plan to give him rules to follow to instill discipline in trading.

·        Trader should have passion for trading and “Never give up” attitude.

·        Trader should develop a trading methodology that fits my own personality and risk tolerance parameters.

What separates the 10% that make money from the 90% that don’t?

Must read for every kind of trader. Enjoy your weekend!

What separates the 10% that make money from the 90% that don’t?

10,000 hours.

The key to success in any cognitively complex field is, to a large extent, a matter of practicing a specific task for a total of around 10,000 hours. 10,000 hours equates to around 4hrs a day for 10 years. For some reason most people that ‘try their hand’ at trading view it as a get rich quick scheme. That in a very short space of time, they will be able to turn 500000 into 10 Lakhs! It is precisely this mindset due to which most of traders fail !!

The greatest traders understand that trading much like being a doctor, engineer or any other focused and technical endeavor requires time to develop and hone the skill set. Now you wouldn’t see a doctor performing open heart surgery after 3 months on a surgery simulator. Why would trading as a technical undertaking require less time?

Trading success, comes from screen time and experience, you have to put the hours in!

Education, education, education.

The old cliché touted by politicians when they can’t think of anything clever to say to their audience. The importance of education to success in trading cannot be placed on a high enough pedestal. You have to learn to earn, the best traders work obsessively to refine their edge further to stay ahead of the curve.

Think for yourself.

“NO! NO! NO!”… “Do not Sell Real Estate Stocks, Market will go Higher”…”Don’t move your money from Stocks! That’s just silly! Don’t be silly!”

A quote from well-known stock guru SP Tulsian aired on CNBC days before 2008 crash, many traders/investor lost 90% of its value. Many followed this call and felt the obvious pain as a result. As the old saying goes, “too many cooks spoil the broth” it is very much the same in trading. Successful traders blinker themselves from the opinions of others; they focus on their own analysis of fundamental and technical information.

Adapt or Die.

Market conditions change and technology advances, thus the conditions for trading are always evolving, the rise in mechanical trading is testament to that. The very best traders through a process of education and adaptation are constantly staying ahead of the curve and creating ever new and ingenious methods to profit from the markets evolution.

Fail to plan, you plan to fail.

The best traders have a well-documented plan; they know exactly what they are looking for and follow that plan to the letter. Their preparation for a trade starts long before the market open, it is this meticulous planning and importantly adherence to that plan that helps them avoid the biggest demons for any trader, over trading and revenge trading.

“Be like Machine”

As human beings emotions pay a key role in our existence, for a trader emotions can be a source of great pain. Trading psychology and the management of your emotions in a trade play a key role in overall success. Fear and greed can cut your winners short and let your losers run. Dealing with emotions follows on from your plan; the more robust your plan the less likely you are to fall into the emotional mine field.

Know your tools

Every trader has a set of tools they use, DOM, Charts, News feeds etc. These tools are a traders bread and butter; they are the most vital part of a traders arsenal, without which it would be impossible to trade. The best traders have mastered their order entry methodology, they know all about the features they need from their charts. This mastery of their tools, allows the trader to get the very best out of the resources they have available to them and ensures perfect execution of their trading ideas.

Know Thyself

Behind all the egos and excess, the best traders know their limitations; they focus on what can go wrong in a trade, and expend a lot of energy in limiting and controlling their risk before thinking about profits. They have a heightened sense of self-awareness and focus on incremental self-improvement.

Profit & Loss

The best traders focus on the trade itself rather than the P&L; they view each trade as a technical exercise and focus on getting the most out of the market in accordance with their plan. They do not think in terms of the grocery payment, the electric bill and the desire to make X amount to cover a loan payment. Focusing on the money behind a trade can cloud technical objectivity.

In Conclusion

The greatest traders work hard to get ahead and even harder to stay ahead. Through increased and niche knowledge they constantly adapt with the market and remain profitable in every environment. Drive, tenacity and the will to succeed is the greatest edge of every successful trader.