By Sam Seiden, Online Trading Academy Instructor
With the many emails I receive, there are always a few common questions people have. Some of the questions are not key questions for trading but others certainly are. Of that key group of important trading questions, I thought I would share some with you today.
Khoi – XLT Student
Hello Sam,
I really enjoy your teaching. It helps me a lot. Would you please explain how we can identify and distinguish a pro-gap vs a novice gap in an uptrend?
Sam –
Hi Khoi,
Thanks for the email. In an uptrend, a novice gap would be a gap up in price, after a strong rally in price. This is novice buying as consistently profitable buyers don't buy after a strong move up in price and they certainly don't buy on a gap up. The laws of supply and demand ensure they will lose over time if they do. During an uptrend, a professional gap would be a gap down in price, after a rally in price. This type of gap typically occurs at price resistance, ends the uptrend, and ignites a downtrend. Below are two charts with illustrations for your review. Hope this answers your question.
Figure 1: Professional Gap in an Uptrend
Figure 2: Novice Gap in an Uptrend
Tom - XLT Student
Hi Sam,
What are the best times of the day to trade if I am an active trader in equities? Thanks for any help .... your articles are always informative ...
Sam –
Hi Tom,
The best time of the day to trade for an active trader in equities is at and around the open until about 2 hours into the trading day. The reason is because at and around the open of trading, markets are at price levels where demand and supply are MOST out of balance. Quantifying demand (support) and supply (resistance) in the pre-market allows us to trade markets "back to balance" at and around the open. This is when market direction is MOST predictable. I began my career on the floor of the Chicago Mercantile Exchange handling institutional order flow. In doing this, I was able to see each day how out of balance things were at the open. In the classroom at Online Trading Academy, we always tell people not to trade the open. If you're a new trader going through our entry level courses, it is a good idea to NOT trade the open as prices move fast and it's not safe for the newer trader. However, once you know what you are doing, you absolutely want to be trading the open when low risk / high reward / high probability opportunity presents itself. In the Extended Learning Track (XLT) programs where we trade stocks and futures, we begin our trading sessions 30 minutes to an hour before the market opens to prepare for these opportunities.
Lisa - XLT Student
Hi Sam,
What do you mean by the term "profit margin?"
Hi Lisa,
Please see the chart below. This is a trade we set up in the Extended Learning Track (XLT) - Momentum Intraday Trading program. Notice the shaded areas on the chart. These areas represent the supply and demand levels we use for entries and exits. For review, a demand level is a price level where the number of buyers exceeds the number of sellers. This is where we expect price to rally (rise). A supply level is a price level where the number of sellers exceeds the number of buyers and this is where we expect price to decline. The top shaded area on the chart is supply and the bottom shaded area on the chart is demand. To answer your question, the area in BETWEEN these levels represents the "profit margin." The plan for us was to sell short at the supply level and take profits at the demand level. While we had two nice levels, that's not enough. We also need a significant profit margin and in this trading opportunity, we certainly had that. Without the presence of a significant profit margin, there is no trading opportunity.
Figure 3: Profit Margin Example
From time to time, I will use student emails in the weekly article for your review and for your benefit. Hope this was helpful.
Have a good day.
- Sam Seiden (sseiden@tradingacademy.com)
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