Gapping the Gaps

Part One

I am going to try to share one of my favorites trading strategies, the one that has allowed me to stop sweating the small things.
I subscribe to different data services for the simple reason that each one has something that interests me a little better to screen for what I am looking to trade.

After years producing a consistent returns it is time to share some of the basic ideas.

There is high risk in any strategy nor strategies are static, they need constant changes in their algorithms and active capital management.

My main strategy after the human design is done, the output has 90% mathematical base and 10% common-sense decision-making component.

As disclosure, this is only for my own use and consumption and it is not inteded to provide any financial advice nor should be use without consulting expert advice. If you choose to do anything with the content I post here it is at your own risk.

I do not trade all year, so I will no post all year, but I will try to post as much as possible before the market opens all my possible trades for the day.

I am not greedy, so I stop trading at the moment the strategy allows me to reach the six figures, that is what I need to have fun.
I will be trading every single stock that I post here, as long as I am not vacationing or I have reach my goal!

As informational bechmark my returns are clean >27% (after tax and trading costs) in good or bad markets. Actually, the worse the market conditions are better it performs this strategy.

It is here for anyone who wants to know how I do it.

The idea of the strategy is simple:
due to news or market conditions a series of stocks react sharply to those news selling-off dramtically and then after a consolidation period those same stocks will come back above their initial trading price.
This is call a gap in pricing, thus gapping the gaps.

Some gap techniques focus in the first 30 minutes of market trading.
Other focus in one full day retracements of 1.5% to 2%.

My strategy focuses in a wider retracement band and in a larger waiting period for the retracement.

I have two series of trades that I entry "the short band trade" of 4% with up to 25 trading days and "the long trading band" with retracements of 7% or more with up to 35 trading days.

You have to follow and consistently stay in the strategy. Everytime I try to deviate from the strategy and tinker with new ideas that are off the main purpose I get nailed. Staying focus is boring but it pays big time.

All stocks I trade have consistent patterns:

1) In all cases over a period of >20 trades they produce at least 16 retracements, in other words, they have at least 80% probability of making the target price. In all cases stop-loss is a must. Retracments are best followed with an Elliott Wave software.

2) All stocks trade at a ratio of at least -10% to +10% from the initial entry. Consequently my stop-loss is 11.5% from the entry point. If you calculate the stop loss to the gains you will find out that the actual risk is less than 2% in the down side, 10% neutral returns and 88% positive trades (all including trading costs of < than $30 per round trade).

3) All selected stocks fluctuate in the upside as much as they fluctuate in the downside. Some days you might wonder if you are better off going long with the selection. I keeps me wonder many days, but I know better and I continue to stay focus. A good japanese candle charting software will put an image on what I am describing.

4) All stocks show a pattern of probability in the downsize after the set holding period of less than 5% and my average is 90% winning trades on trading days, and 95% if I see the rational to extend the holding days for a new cycle.

5) The open positions can be large, a few times when the market was in a flat pattern I hold up to 25 stocks. My average is to hold up to 7 stocks at any given time.

6)I use a discount broker, I add the trading costs and I deduct taxes after each trade to calculate the algorithm profitability. I use a scale to qualify each stock performance for a number of trades -usually 20 trades or more. The scale is 8, 9 or 10. This means the stock was profitable in the algorithm 80%, 90% or 100% in the last 20 trades. Consequently, every 3 months the stocks I follow changes.

7) The trading days pattern I follow can be as short as hours up to 35 days. Look at UHCO today5/9/06. I bougth it and sold it in three hours with 7% profit.
But that is not the norm. The norm is holding any stock for a few weeks. I resort to have a holding average day for each stock, but this is only informational. The rational is that a stock that passes the average holding days, and is trading the upside has > 90% provability to be profitable and the contrary is also true.

How I work the trades:

1) Before the market opens I screen for the daily trades and do a print out. If I have a large amount of stocks I choose those with the highest return grade -9 or above.
2) I set the the buy price and the amount of shares.
3) The amount of speculation in the market is so large that sometimes my buying price is off and far higher than the initial volatility prices, it is not the norm, I do not worry if it occurs until the stock settles after a few days.
4) Imnmeditely after I buy. I write the stop loss on my trade list book (I do not auto entry the auto stop- loss, that's just my habit) and put the selling price with the broker. If it is a short entry the sellign point will be 4% above the purchase price if it is long entry I add 7% to the purchase price.
5)The amount of weekly trades averages 2.5, so it is boring but profitable.

Let me know your comments.