Wednesday, November 21, 2012

The Fifteen Minute Rule

Intra day traders / Swing Traders often face difficulties in entering the market when there is a gap open. But the gap need not destroy your trading plan. You can do a quick analysis, adjust your trading strategy and get into a good position well after the crowd pulls the trigger on a gap play. Here is how.

Let the index/stock trade for the first fifteen minutes and then use the high and low of this "fifteen minute range" as support and resistance levels. A buy signal is given when price exceeds the high of the 15 minute range after an up gap. A sell signal is given when price moves below the low of the 15 minute range after a down gap. It's a simple technique that works like a charm in many cases.

If you use this technique, though, a few caveats are in order to avoid whipsaws and other market traps. The most common whipsaw is a trading range that lasts longer than 15 minutes. If an obvious range builds in 20, 25 or even 30 minutes , use those to define your support and resistance levels. Also consider the higher noise level in the morning. A breakout that extends only a tick or two can be easily reversed and trap you in a sudden loss. So let others take the bait at these levels, while you find pullbacks and narrow range bars for trade execution.

2 comments:

Dinesh said...

Dear Sir,
I read somewhere that it is better to avoid initiating a trade in the first 30 minutes but I think, there is an exception to this rule. If the momentum is strong (like the one we had after QE3 was announced), it is better to just ride on the trend instead of waiting for the 'cooling off' period to be over.
Regards,
Dinesh

Ssaameer Sunil Limaye said...

Sudarshanbhai,

Thank you for explaining the rule in detail.

Seeking your blessings,
Ssaameer Sunil Limaye