Tuesday, May 31, 2011

Daytrader Toolbox: when to short the gap up

We had a lot of spots in our newsletter last night that we liked if they could have waited a few days.  We had nothing that was ready.   A number of them gapped above and proceeded to sell off for the morning.   Reader M.D. wrote to us last night:
“I understand your preference on the market action.  On many setups you write ‘needs a day’ or a few.  What if the market does not play ball, and the alerts trigger tomorrow?  Do you pass on them?  Or if not, how would you play?”

We answered back:

“Then we usually look for shorts on breakout failures, shorts on ES, or just sit it out.”

If the market has run a lot for support to resistance, and there are no alerts that are ready, then shorting a gap up is usually a very good risk-reward trade.   This is very similar to our strategy of  buying the gap down on a market that closes oversold on support.    It has a very consistent win rate and something we recommend you add to your tool-box if you are a daytrader.

Big run from support to resistance — silly gap up on an extended market means good risk-reward short.

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