Trade lesson: Catch the intra-day gap fade

[InTheMoneyStocks]

TRADE LESSON: Watch for stocks that have had a multi-day rally. It is important that they are very extended from the 60 minute 20 moving average. Look for a strong gap higher to start the day into a past resistance level or a whole round number. Then enter a short position with a tight stop. Once the trade is in the money you should cover half and move the stop into the money or break even and look to cover the rest at the next support level. This trade occurs every trading day.

http://inthemoneystocks.com/userfiles/image/cat%2010_20_09.bmp

[Florida]

This is a strategy that I use frequently, but with a few additional qualifications.

1. I will never enter a play at the open on this strategy if the stock is gapping up based on a good earnings report. A strong earnings report can and will propel a stock well beyond any resistance, and for every stock that reverses like CAT did today following earnings, I can show you 2 that will not reverse, but will continue to rally, (especially if the market goes with it).

This does not mean I will not watch a move like CAT very closely, and if it shows that it is breaking down in the first few minutes of trading, and the market supports the move, then I will enter with maybe a little wider stop.

2. The other critical component to this type of trade, is setting the proper stop, and target levels. Just to enter a "tight" stop, is not detailed enough, and closing out half the position when you are "in the money" and moving the stop to in the money or breakeven can result in taking profits too soon and perhaps not allowing for the proper risk reward ratio in a highly speculative trade such as this.

As I stated, I do use this strategy often, and find it to be very effective, but please understand, it highly speculative, and you must know your risks and goals before entering the trade, then stick to them, without exception.

By the way, the same strategy can be used in reverse on a stock gapping down after a multi day move down. You can play it long at the open empolying the same criteria for stops and targets.