%% Good points, good gap wisdom+ o poster TraderJ. a] Study all data [a]AIG,, BAC,[c] C have a huge downtrend on 10 year chart.[SPY is up on 10 year candlechart.]NOT to mention much ,Jim Rogers made some bearish bank comments again this year; amazing amount of negative fundamentals in IBD + news against big banks; WFC may do well in a bull market. Suprise can happen overnite anyway-I am suprised that sector is not gapping down already Single stocks are 2 risky for me;sectors or stuff like DIA may help. Not a prediction wisdom is profitable to direct. Dow [DIA] can be manipulated,IBD warned [d] Stuff like DIA does gap overnite; but like Rich dennis warned ''there is an insurance premium in overnite holds''
----- If being a bit more specific... I need to reduce size on each position until comfortable given the possibility of a large (10-80%) gap against. I was thinking a quarter of the account per position, but an eighth would in fact be more my comfort level. In the extreme case 1/8 * 80% be would be a 10% loss on the account. Maybe a once per decade event if actively trading. ------ Also because of that reason I have split my account into 30-50 single stocks which I swing trade. With my leverage (1:10) and fully using it, I wouldn't feel comfortable with less diversification.
In stocks trend trading way to go, buying dividend producing and optionable stocks, so I can get an extra 10% more, if selling short in downtrend, non-dividend optionable stocks, diversify-never have more than 5% in any one stock. So when stock(s) do gap, you not wiped out, and might be a possibility of keeping the gapped stock if it pays high enough dividend and was bought low enough. We will have more 2008/2009 and can get in cheap on stocks buying good dividend stocks for 401ks.
Sure i would exspect more 2008 bear trends,USO got there bear [200 dma]early],LOL But just like Bull trends tend to gap up[Wisdom is profitable to direct; not a prediction]; Bear trends like USO gapped down againpast 24 hours] even if few shorts covered recently . So when Rich Dennis said it so well to jack schwager; ther is an insurance premium in ovenite holds[position w swing trades/Invests
I use options so there is less money on the line and the risk/reward is clear. By reducing the amount of capital that is held overnight there is less capital at risk. So I would not have overnight the whole account in options. I just set aside for situations that I am concerned about gaps (earnings announcements). I pay close attention to the expected move on the options and the ATR. In all, I consider the risk and the rewards and try to limit the risk. Sometimes I will use vertical spreads to further reduce risk even though there is potential gains to be missed. Sure a big move can wipe out an option position but the chances are more money would have been lost if shares were held instead. At times I won't hold the position if it does not fit risk profile. It is important to know the risks and be comfortable with them.