Another Stock Market Trading Tactic for You All To Know About

dave - stock market trading tacticAbout a month ago, I outlined one of the strategies that I use to trade on the stock market; trading secondary offerings for major profit. I have received a few emails in the last little while, asking if I would be able to outline any more of the strategies that I used when I used to trade. Here is another one. I call this the "Drop of Death."

What is the "Drop of Death?" Well the basic idea behind the strategy is that if a stock announces really bad, unexpected news, then it will likely gap down and continue trading lower through the rest of the day. The basic idea is this: bad news strikes, the stock gaps down, and Joe Average wil sell his shares throughout the course of the day. The stock may rebound slightly off the open when short-sellers cover their positions and bargain hunters pile in, but more often than not, the stock will close lower than where it opened.

Obviously you do not want to use this strategy with every stock that announces bad news. There are some criteria that I like to follow. Here they are:

-identify stocks that are gapping down in pre-market due to unexpected bad news (earnings miss, product delay, management scandal)

-you are looking for at least two downgrades from major Wall Street analysts. These downgrades will help give your short position some "juice." These downgrades will help to do two things: spook Wall Street even more, creating more downwards pressure on the stock, and encourage investors to dump their shares, as things are looking bleak.

-you are looking for liquid situations. We are looking for a normal daily average volume of at least a million shares, with major volume activity in pre-market.

-obviously you want to set a stop loss once you short the position. I like to set a stop of about 3%

-I look to short just a few minutes before the market opens

This is a fairly high risk trading strategy, though the profits make it worth it. It is really hit and miss. You can have two days in a row where you get stopped out, and then the next day you will make 10%.

The basic premise is that newly damaged stocks, damaged due to really bad news, will continue trading lower throughout the day as buying pressure will evaporate and people will take the opportunity to dump shares whatever chance they can get.

If you are a new trader, I would recommend the secondary trading strategy, as it is a bit lower risk. However, if you are a seasoned trader, you may want to take a peek at shorting damaged stocks off the open.

Filed under: Stock Market Education | General Knowledge

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