April 10, 2007 at 9:21 am | | Comments 4

Gap Lessons: When Trades Get Lucky

I’ll never forget when it happened. I had been swing trading the stock regularly, and it had been very good to me in the weeks leading up to the big gap. I was sticking and moving, making a few points here and there, and my account was getting bigger because of it.

And then came January 3rd, 2000. Emulex (ELX) gapped up a whopping 47.5%. It was completely huge, and I was stunned. I had never caught a gap so large, and I was instantly frozen in disbelief and excitement. “This stock is headed to the moon, and today must be the day,” I thought.

Or was it??

Soon after it opened, it marked the high of the session roughly up $29 (just about $2 higher than the opening level), and soon worked its way lower to finish positive by only about $7. BUT, I got lucky three times that day…

The first way I was lucky was that it gapped higher to begin with.

The second way I was lucky was that I panicked and sold after it started falling like a rock, getting out well above the closing price.

The third way I was lucky was that I learned a valuable lesson: TAKE THE MARKET’S GIFTS!

Times Have Changed – Slightly

The gaps aren’t as big these days because the market’s not as volatile, but gifts still come from the market and you just might get one if you’re lucky. When it happens for you, keep a couple of things in mind:

* It’s alright to sell at least SOME of your shares. Too many investors and traders think they must be in a full position or close the trade completely. But with commissions so inexpensive these days, it can really pay to make partial sales and pay the commissions for multiple exits. Why not lighten up your exposure and make some of those gains real?

* The professionals are probably selling. Market makers and fund traders love to flip shares into strength, knowing they will be able to reload at lower prices after the euphoria wears off and the little guys stop buying. They are the big dogs that can really move the markets, so follow their lead and use your agility to book profits when the getting is good.

* Regret is a loser’s game. Too many individual investors and traders see a big gain start to disappear, and they quickly resolve to exit the trade once it returns to its high-water mark. When it continues to sink lower and lower, regret sets in like a millstone around their necks and prevents them from bailing out while they still can. Don’t let regret dictate your decisions. Use your head – making logical decisions under the gun can mean the difference between failure and survival in the market, so don’t get greedy or you’ll regret it. The idea is to compound your money, not your mistakes!

Jeff White
President, The Stock Bandit, Inc.

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]