How can stops be protected against fake gaps ?

Discussion in 'Risk Management' started by KK70, Sep 4, 2008.

  1. KK70



    I am looking at a chart of CVC.

    The opening prints at 9:31 AM today had the stock gapping down at 29.00-28.50 compared with yesterday’s close of 31.54 albeit on small volume (500).

    Then sanity was restored and the stock gapped up and started quoting at 31.45 from 9:32 AM onwards.

    My question is: how can one protect oneself from such fake moves? If I am holding an overnight long position with a stop well below yesterday’s close, how can I ensure that the stop will not be taken out by such false moves?

    I notice that this happens mainly on NYSE stocks.

    Thanks for your opinions !!
  2. Don't trade stocks, trade options.

    If you hold a stock overnight, your biggest risk is a gap against you. If you'd bought a call instead, your max risk is your net debit. Gaps against you can't exceed your initial net debit.
  3. KK70



    Thank you for posting.

    I dont have a problem with gaps, it is a part of the business.

    But it's the fake gaps like the one on CVC today that concern me.

    The CME busts trades that are outside its permitted price band.

    Will the NYSE do the same with CVC I wonder...
  4. How can you tell a gap is fake or real? Is that implying that some of the ticks were basically data errors and not actual trades?
  5. KK70


    Yes, I am quite certain that CVC's morning activity today was a data error. All the major data providers have the same data for the 9:31 bar so it is not data-provider specific; probably the fault of the exchange.

    But even it is a data error, would stops underneath have been triggered because of the error is the question...
  6. NoDoji


    Why would you assume it's an error? There may have been pre-market trading that drove the price down, then everyone rushed in and bought on market open, driving the price back up. In which case your stop might easily have been triggered at the open if it was in that range.
  7. Here is how I handle it, my stop/exit auto app allows me to designate how many ticks that must occur before it will execute.

    For example, I went long JNJ during the opening range this morning, I set my stop using a 3min, LCL (lower closing low bar) set to 5 periods. I also set my Tick setting to 3, so that 3 'bad' ticks would need to occur. I can set the stop using EMA, %, or dollar.

    Additionally, I can set a Time feature instead of Ticks required.
  8. KK70


    Thank you, having a threshold volume/tick filter before the stop executes is a good idea.

    But nonetheless, I just wish such opening prints were more fluid on the NYSE. An opening gap of 10% which quickly disappears after 2-3 tics just causes mayhem for swing/position traders.

  9. These are not "errors".

    They are actual small, "outlier" trades...
    That happen because the Market maker is screwing someone:

    (1) Maybe an erroneous order is being filled 10% off the market.

    (2) Maybe the MM lets a thin market plunge/soar to hit a stop some idiot left overnite.

    (3) Fill in the blank.

    This happens all the time in stocks that trade < 100,000/day...
    And is VERY noticeable in low volume stocks.

    These "outlier" trades are a windfall profit for MMs...
    The trade is never available to any retail account.
    MM can just call a "fast market" and pretty much ignore all retail orders...
    While they skin a mook.

    Using stops for stock trading...
    Is the lazy man's strategy for bankrupcy.

    In effect...
    You are saying you cannot manage a real-time Portfolio.

    In the last year I've made > 100,000 trades... and ZERO stops.
  10. KK70


    Thanks for responding, your post is informative.

    I infer that you do not use overnight stops. How then would you respond to a situation where your stock gaps up (or down) big time against your position?

    Would you wait a few minutes to see if the gap is real (and in the process perhaps risk it going even further against you)?

    On balance, how many times have the adverse moves turned out to be real and just went on in the direction of the gap and left you with a whopper loss? When exactly do you decide to throw in the towel and cover your position?

    I am really unsure how to handle this situation.

    #10     Sep 13, 2008