NIFTYSTATISTICSTOOLS

Intra day traders / Swing Traders often face difficulties in entering the market when there is a gap open. But the gap need not destroy your trading plan. You can do a quick analysis, adjust your trading strategy and get into a good position well after the crowd pulls the trigger on a gap play. Here is how.

Let the index/stock trade for the first fifteen minutes and then use the high and low of this "fifteen minute range" as support and resistance levels. A buy signal is given when price exceeds the high of the 15 minute range after an up gap. A sell signal is given when price moves below the low of the 15 minute range after a down gap. It's a simple technique that works like a charm in many cases.

If you use this technique, though, a few caveats are in order to avoid whipsaws and other market traps. The most common whipsaw is a trading range that lasts longer than 15 minutes. If an obvious range builds in 20, 25 or even 30 minutes , use those to define your support and resistance levels. Also consider the higher noise level in the morning. A breakout that extends only a tick or two can be easily reversed and trap you in a sudden loss. So let others take the bait at these levels, while you find pullbacks and narrow range bars for trade execution.

1. What should be the price and volume action which we should look out for in this trade?

There is a 15 minute range. Thus, there is a high point in the range and a low point. An ideal condition for buying will be for prices to remain close to the high point for the past few minutes, making some kind of a consolidation. When prices breakout from the high of the 15 minutes, we will also have a breakout from this consolidation. This is better than one breakout. The reverse is true for breakdowns. Volume should exhibit similar action, increasing near resistance and falling near support (for a bullish breakout). Now, all of this defines an ideal condition, but real life is different.

2. Can we predict some target for this trade?

should not try to predict what the market will do. Instead, we can say, this is what I, the trader will do. So, an up breakout should move up by the same amount of points as the 15 minute range (high - low). The trader can plan to take partial profits at this level. A lot of innovation can be done with levels, R1, R2, prior resistance and support.

3. Where should we keep our stoploss?

the other side of the range. If you go long, the stop should be just below the low. As the trade moves in your favor, move the stop to the mid point of the 15 minute range. Again, you can do a lot of experiments with stops & exits.

4. Shall we trail in this setup?

My research suggests that you try to have a break even trade after you see the trade move in your favor. But, beyond break even, let the market decide what it wants to reward you with.