One of my favorite all around strategies and that includes trading is the Tail Gap Strategy and today I will highlight how to apply it to trading stocks. If you don't remember the strategy or demand a refresher you can download a copy in the strategy on our home webpage. In a nutshell the Tail Gap Strategy can be a simple pullback strategy that involves a shorter deviation from the main tendency. When applying the Tail Distance Strategy to day trading I would like to see a gap against the direction in the main trend.
The pullback must produce a 10 day price low and will need to have a gap between the most of the 10 day price low and the previous day's low price. Since we are day trading and not having positions overnight I'm ok with all the stock being in a trading range instead of trending strongly.
Once you identify the set up correctly you can place some sort of buy stop order $0. 02 cents above the high that had been made on set up time. Make sure you place your buy stop prior to a next trading day. This set up often triggers immediately with the opening bell or a short while thereafter; to stop having to watch the market place second by second and risk being late towards the game I recommend a straightforward buy stop order 10 to quarter-hour before the opening bell.
Once you place your order you must monitor the market or make sure your brokerage firm has a method to quickly notify you of your own fill. There is a chance that the stock can drop quickly when you finally are filled; therefore it's important for someone to place your stop loss at once to prevent the stock coming from dropping below your stop loss level before there is a chance to place your cease loss. After you place your protective stop loss order you must place your exit order. The exit is very simple and from testing several methods used in day trading stocks I find that market on close or MOC orders work especially well using this type of method.
I want to demonstrate that the method works equally well towards the short side as it really does going long. As a matter of fact I favor to trade this method towards the short side because markets drop faster than if they move up. Keep in mind since we are day trading I don't want trading range bound markets instead of strong trending markets when I personally use this methods. I won't trade against the trend but if there is no trend and I go to the good set up I is going to take it.
You can see your stock makes a 10 time high and gaps up. Notice with this particular example how the market place is range bound and trend-less. Providing the trend is not transferring upwards the trade is valid and is particularly worth taking. This strategy tends to shift quicker and produce more volatility to the downside over the future.
Once you identify the pattern it is advisable to place your sell stop loss. This will be your entry order and I would like to make sure you don't confuse sell stops with buy ceases. When you are trading this strategy short you want to place a sell stop to enter and a buy stop as your safeguard order. This is the opposite of how it works when you're in long.
Assuming you are filled morning you want to place a buy stop order soon after you get filled. Never wait till the past minute because the stock can easily rally past your exit level whilst you wait. It doesn't happen often but it does happen once in a while. After you are filled you want to place a MOC or Market On Close order so that it's not necessary to watch the market all time. Getting out at the close gives you the most time for your position to work to your benefit.
Here is one last example to help you to see the entire progression from starting out end. I'm using another short example because I favor to trade this method towards the short side but it works equally well trading towards the long side as it does trading towards the short side. You can see with this example a perfect Tail Distance formation.
Be patient and lose time waiting for set ups like this anyone to come along. Don't forget to put your protective stop loss order when you finally get a confirmation of your own entry fill price.
After you obtain confirmation of your fill so you place your stop loss plus your profit target orders there's almost no to do. Don't let intra-day emotions have the better of you. Stay with the trade and also ride it out till the close it doesn't matter what happens.
Keep in mind that it strategy and most good trading strategies need stocks that are volatile and move quickly. You don't need to get stuck in a stock that's moving like a tank when you're day trading this method.