Technical Analysis of Stock Market for Beginners by Stock Market Guru
Author:Stock Market Guru
Language: eng
Format: epub
Tags: Stock market, stock market investing, stock investing, stock market for dummies, stock market books, stock markets, stock market trading, learn stock market, investing in the stock market, how to invest in the stock market, stock market basics, how the stock market works, stock trading, stocks, penny stock investing, trading stocks, stock trading books, stock investment, how to buy stocks, investing in stocks, stock investing books, stock investing for beginners, investing stocks, stock analysis, Stock technical analysis
Publisher: Gala Publication
Published: 2015-06-15T00:00:00+00:00
Stop Losses When Markets Open with Gaps
‘‘If you can’t take a small loss, sooner or later you will take the mother of all losses
- The New Market Wizards
On some days the markets may open with either a gap up or a gap down, whether driven by global markets or by some positive or negative news overnight. The question then is - should you remove the original stop loss because the gap could trigger the stop and close your trade whereas the market may recover later in the day and move in the direction you expected?
Here is the answer: Remove the stop loss if you expect the market or the stock you are in to open with a gap up or a gap down from the price it closed on the previous trading day. Observe how the market is set after the gap opening and then put the stop loss once the price stabilizes.Let’s take the example of an oil and gas stock that is moving up strongly. After the market closes, there are news reports that the company may have overstated its gas reserves. But this news report has not yet been confirmed by the company. You are, however, sure that the stock will open with a gap down and your stop loss will be triggered. What should you do? In such a case, remove the stop loss. Let the stock open with a gap down. It is possible that the news report is motivated to provide an exit to those who are short in the stock. Then, if the stock opens with a gap down but quickly recovers, it may signal that the report is not credible. However, it is also possible that the stock opens with a gap down and continues to drift lower. In that case, institutional investors or sophisticated traders may have decided that the news report is damaging enough to break the trend. You should then put a stop loss at the next support level so that you don’t end up losing a large amount. At the same time, you would have ensured that a temporary dip has not left you with a loss because of the stop loss being triggered, rather than the profit that you would have made had you let the stock recover from a temporary pullback.
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