Traded Funds (ETFs) and otherwise illiquid securities. My first run-in with the gap robber occurred back in 2005 when I took a stab at trading ABB. Due to its predisposition for daily gaps as well as my own naivete, I got nailed by a few percent when it gapped above my entry price. To add insult to injury I also lost more than expected when it gapped below my stop loss exiting me at a rather unenviable level.
iShares Silver ETF (NYSE:SLV) is another popular ETF which has become a frequent playground for the gap robber. Due to the large, often volatile moves occurring in the silver futures market outside the regular trading hours for U.S. equities, the SLV has to gap up or down each day to compensate for these after hours moves. As you can imagine this throws a whole wrench into the entry/exit process for traders. Take the recent three day oversold bounce occurring from Friday May 6th to Tuesday May 10th for instance. Swing traders looking to play the oversold bounce were shafted on the entry and exit as SLV gapped both above the ideal entry as well as below the ideal exit.
To minimize the pesky gap robber’s thievery consider the following actions:
1. Avoid swing trading stocks with a history of frequent gaps altogether.
2. If you are inclined to trade these type of securities, consider day trading them and avoid taking positions home overnight.
3. You may also consider playing them on a higher time frame such as a weekly chart with smaller position sizing. A longer time horizon and a smaller position will diminish the affect of any minor day to day gaps.
About: Tyler Craig, author of Tyler’s Trading and owner of TC Trading, Inc. Over the years I’ve educated hundreds of traders through my work with one of the nation’s leading educational firms. I enjoy writing and am a current monthly contributor to the Wealth Intelligence Magazine. My writings have also been featured in Expiring Monthly and frequently show up in the Abnormal Returns Options Newsletter. In 2009 I started Tyler’s Trading to share daily market commentary on stocks and options.