The Secret to Holding Stocks Overnight
This may sound radical to you, but it's still hard for me to keep money in the market overnight. I know you're laughing, especially you long-term investors who keep your money in the same stocks year after year. But for me, the daytrader, it's unsettling. I always try to end my day in cash, selling whatever I bought that day before the closing bell.
Early on in my trading career, when I kept a position in a trade overnight it was like drinking 20 espressos just before bed. I would wake up in cold sweats, get up several times a night to check the quote screen or spend the night staring at the clock until the opening bell. That is, until I learned to recognize a repeating pattern that put the percentages on my side. I learned how to "play the gap," and how to hold a stock overnight without getting caught in the morning.
Here is how I play the dumpers -- stocks that dump more than 20% in one day -- for the gap. (For more on dumpers, see last week's column.) First, I watch dumpers at the end of the day for buying action in the last five minutes of the market, sometimes buying in the last few seconds. This, in itself, increases my percentages.
Many traders play the gap by buying 30 minutes prior to the closing bell. In my opinion, buying in the last 30 minutes leaves too much time for the stock to reverse. Why would you bet on a horse race when it has just started? Why not wait just a few seconds before the first horse crosses the finish line, then bet on the leader?I have three criteria I look for in a high-percentage, end-of-day dumper gap play:
- The news is not really that bad (but still causes an overreaction). The stock ends up near the bottom of the pattern (near the low of the day). There should be no more than 50% selling in the last five minutes.
Play the Rule, Not the ExceptionThis particular stock was the exception to the rule. It opened at 153 1/2 and only dropped to 152 before starting a slow climb to end the day at 169 1/4. But remember, the norm is for stocks like this to gap up, then sell off quickly after the opening bell, then bounce at some point. This initial selloff and bounce is mostly attributed to daytraders taking quick profits. If daytraders are not confident in the stock's strength or momentum, it will sell off quickly and create another wave of panic selling from the investors, causing it to tumble even further. If you hold, you will eventually get caught in a "death spiral." Hindsight will kill you on situations like this. Don't get lured into the trap of saying, I missed out on a big run, next time I am not going to sell at the bell and hold for that big climb. Over time, holding will decrease your percentages and damage your portfolio. Stick to the rules every time! Whenever I hold a daytrading position overnight, I do increase my risk. Many things can happen after the bell. Companies can release damaging or even devastating news nobody counted on, causing the stock to gap down a large percentage. That is the risk I take when I play end-of-day gaps. I put the odds in my favor because I only play gap patterns when they meet my high-percentage criteria and they are currently gapping up a very large amount, making it worth my risk to hold overnight. When they are hot, they can produce phenomenal gains; when they are not, I don't play them and expose myself to the added risk. Next week I will conclude with dumpers by talking about intraday oscillation dumper plays as well as tell you how I figure if a stock is worth playing by calculating the upside and downside potential built into it. Until then, hum along with me. . . Mr. Sandman, bring me a dumper,
Make it hit the bottom of the pattern,
Make the news not so awful so everyone sells before the bell. . . Ok, no more bad lyrics. I think I will stick with my daytrading job.
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