Thanx for the kind words guys. I used to play gaps a lot. Lately, however, I've noticed that not all gaps are created equal. They seem to run in cycles, and I'm always a step behind. sometimes, the first print is the low of the day, other times, it is near the high, and the stock just fades lower. The specialist definately has many advantages.The more volume he has, the more he can move the intraday ranges in the 5 min bars for instance, so instead of scalping 20c on say 50k shares in the first few 5 min bars, he is gonna scalp 50c at a time on a half mil shares. At the same time, if there is a big move, the specialist has to use his inventory to deal with the big move. Beyond knowing that, I have stopped playing gaps now. I think it's better to understand that the nature of the gap is basically gap -> consolidation in the first 10 mins -> breakout of consolidation -> reactory phase -> continuation in the direction of the breakout. Therefore, I find that the best plays are the first break from consolidation, and then the reactory phase. I choose not to often play the break from congestion on a gap just b/c often it will break and move a point or 3 on very few prints. Therefore, I can't get enough stock at good prices to make it worth my trouble. Instead I like to fade that move, and catch the reactory phase. The reaction is usually a move of a good 50c-3 pts on an average 20% gap. The good thing about the reactory phase, is that as the stock is bottoming, you can get as much stock as you want on the bid and just average into it. Since the specialist is doing the same thing as you, you can count on him really shoving the stock up once he has enough so he can sell higher. Don't forget that he is fading every move essentially out of his inventory. Then the continuation of the origional breakout is harder to predict. Sometimes, the reactory phase will continue til close, but generally, it will run out of steam, and the stock will continue in the origional direction. You can definately take advantage of this move, but I usually choose not to, b/c by say 11 est when this starts, I'm onto my main day trades, and not scalping gaps anymore. I like to scalp small size in the morning to warm up, but by 10:30, I want my main 5-10k positions on for that day.
I have to agree with tharp. The nyse is a significantly more efficient and fair market. I with the nasdaq would get rid of all those idiots and go to a fair market system, especially for thier less liquid issues. There are lots of stocks out there that have nice moves, but are untradable, cause the spread is 50c wide, with 100 shares each way.
praetorian2 Great educational explanation. Even though you are talking about NYSE stocks, would these phases be applicable for NASDAQ issues as well? Thanks.
I found this link from a site and it talks about playing gaps as well. It is more basic than what you guys are talking about but I think sometimes a picture helps as well-particularly for newer traders like me. Also, I am guessing from some of the narration that there was a more detailed introduction preceding this one, though I don't know how to find it. I emailed the site and will post if I find anything out. http://www.tradecourse.com/modules/snap_gap_momentum.htm