![]() In this article I will focus only on the stocks that were predicted to gap down.įigure 1: PIE CHARTS OF STOCKS PREDICTED TO GAP DOWN. The stocks that gapped down were segmented into three distinct categories, while stocks that gapped up were categorized into seven distinct categories based on the types of patterns that they generated. In the case of negative guidance, there is usually a gap down. When positive guidance is issued, the effect is almost always (93%) a gap up. The stocks gap up or down based on earnings guidance. Over a period of six months, I gathered data on a sample of 129 stocks that were predicted to gap up and a sample of 350 stocks that were predicted to gap down when the market next opened. While Lss tools and techniques are typically used to improve industrial and service processes, I utilized the tools to improve a stock trading plan based on the hypothesis that gapping stocks will eventually converge to some normal trading range. I applied a Lean Six Sigma ( Lss) approach for the definition and analysis of this work. Not only that, if stocks are underpriced, abnormal returns can be generated over a three-year period as arbitrageurs act to eliminate the inconsistency in stock price. Convergence traders with logarithmic utility functions could trade in ways that stabilize markets but will amplify market shocks if the shocks are large enough to severely deplete their capital.Īdditional research also shows that asset prices converge more slowly to their fundamental levels when the traders’ capital has been impaired by trading losses. However, some research suggests that if convergence trades are “unwound” prematurely, asset prices would tend to diverge further from their equilibrium values instead of converging. Normally, convergence trades tend to move prices toward their long-term equilibrium values and, thereby, stabilize markets. Check it out.Ī convergence trading strategy is based on the theory that when the price of a stock or stock portfolio significantly deviates from its long-term trend, it will return to its original trend sooner or later. ![]() ![]() Mispriced stocks are often caused by gaps, which you can take advantage of by applying a strategy that generates above-average returns while reducing your risk. Apart from signaling the start of a new trend, gap openings indicate reversal of previous trends.Using Six Sigma Standards Short-Term Profits With Gap Trading The reverse holds true in case of a ‘gap down’ opening for a stock. That could in turn signal the start of a new trend if the gap up open has occurred post a prolonged period of consolidation. If a stock opens much higher than its previous closing price, it is said to have a ‘gap up’ opening. This results in an imbalance in supply and demand when the market opens the next day. Opening gaps result from a newsworthy event that happens after trading is over. It occurs when the price of a stock makes a sharp move up or down with no trading occurring in between. Gap is a break between prices on a stock chart. It’s a clear indication that the bears are in control and it often signals the start of a downtrend. Traders sell a security when it breaks below a support level as a further downside is anticipated. BreakdownĪ breakdown is a price movement below an identified level of support. Price breakouts supported by heavy volumes suggest a bullish conviction and more buyers are likely to emerge. It occurs when a stock’s price or volume exceeds the previous resistance level. It can be a price breakout or a volume breakout. BreakoutĪ breakout is a breach of the previously recorded highs. In this series, we explain how technical analysis works how to identify trading opportunities through it and decode various concepts associated with it. BQ Learning is a special show that seeks to demystify financial markets, economic theories, legal processes and political structures.
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