ForEx4you
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ForEx4you
Gaps At The Top
The gap that appears at the top of a trend is the one that provides the ominous information. Remembering the mental state of most investors, the enthusiasm builds as the trend continues over a period of time. Each day the price continues up, the more investors become convinced that the price is going to go through the roof. The "talking heads" on the financial stations start to show their prowess. They come up with a multitude of reasons why the price had already moved and will continue to move into the rosy future.
With all this enthusiasm around, the stock price gaps up. Unfortunately, this is usually the top. Fortunately, Candlestick investors recognize that. They can put on exit strategies that will capture a good portion of the price move at the top. Consider the different possibilities that can happen when witnessing the gap up at the top of a sustained uptrend. Most of the time the gap will represent the exhaustion of the trend, thus called an Exhaustion Gap. Or it could be the start of a Three Rising Windows formation. Or big news, a buyout or a huge contract is about to be announced.
What are the best ways to participate in the new potential, if there is any, at the same time knowing that the probabilities are that the top is in? A few simple stop-loss procedures can allow you to comfortably let the price move and benefit from the maximum potential.
Hopefully, in the description of the gaps occurring at the exuberance of an extended trend, you have already experienced a substantial gain in the position. Any gap up is adding to an already big gain. Probabilities dictate that this is the top. Possibilities could include more upside gains.
Upon a slight to medium gap up, the Candlestick investor should put their stop at the close of the previous day. The thinking being that if the price gapped up, indicating that the top is in, and the price came back down through the close of the previous day, the buying was not sustained. If so, the stop closed the position at the level of the highest close in that trend.
Look at Figure 10 - NXTP, Nextel Partners Inc. If you had bought the stock the day after the Harami signal, showing that the selling had stopped, the open may not have been the strength wanted to show that the buyers were stepping in. After the price opened lower the next day, not showing resumed buying, a good spot to put the "buy stop" would be at the closing price of the previous day. The thinking being that if the price, after opening lower, came up through the closing price of the previous day, then the buyers were still around. Buying price = $4.50.
After a few weeks, the price starts to accelerate and finally they gap it up. News was probably looking very rosy at this point. Now the Candlestick investor is prepared. Knowing that a gap up at the top indicates that the top is near, they can implement strategies to maximize profits. Most investors will know that their position is up almost 100% in three weeks. That is not the type of move that will be missed by most. Upon seeing the bigger price days and volume picking up, the Candlestick investor will be ready for any sell signals that appear.
When the gap open appears, a number of strategies can be put in place. First, a stop loss can be put at the closing price of the previous day. If prices start falling off immediately and come down through the previous day’s close, then the bears have taken control. You are out at the high close of the uptrend. In this case, as the price moves up, it would be safe to put a stop at the open price.
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