Dealing with the Disaster of the Monster Gap

So how do you deal with an open position that one day was profitable and the next a major disaster strikes the stock and it gaps extremely hard against you?  Occasionally all traders wake up to find that an unimaginable trading nightmare becomes a cold hard reality.  Do you have a plan for what to do if that happens to you?  Here are some ideas for a creation of a game plan to allow you to react rationally when you have to wake up to this nightmare.  First of all you need to gain control of your emotions and relax, realize that sometimes bad things happen to good traders.  

Initially, watch the stock market open and monitor its trading activity for a full five minutes.  Do not sell or buy more stock just watch the trading action during this time.  Realize that this 5 minutes is ruled by panic and over reaction on the part of all market participants.  

After the five minutes ends take note of the lowest or most extreme price during these five minutes.  This price is your support/ resistance for the next 30 minutes.  If the stock breaks this price level you must close at least half your position because the odds are going against you.  Now after this 30 minutes passes you should take note of the new price extreme (low of day for longs/high of day for shorts) created during this 30 minutes.  This is now the new support or resistance level.  If the stock price breaks these levels you should exit the rest of your position, otherwise you should consider a trailing stop loss and follow the stock as it recovers towards the end of day.  Finally evaluate whether you consider that the stock has just made a climactic bottom or top.

1. Watch and Wait.

2. Identify the 5 minute lod/hod.

3. Exit at least ½ of your position if stock breaks the lod/hod of these first 5 minutes within the first 30 minutes of trading.

4. Identify the 30 minute lod/hod.

5. Exit the remainder of your position if the stock price breaks this lod/hod support or resistance.

6. Follow your positions with a trailing stop.

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