Given the thousands of securities available to trade, the stock market provides a veritable bonanza of choices. Watching a trader’s initial venture into the trading arena is often like viewing an episode of Supermarket Sweep. For whatever reason the show played quite frequently at my house when I was a kid. My memory is a bit foggy, but I’m pretty sure I enjoyed watching it more than playing with my G.I. Joe.
The idea was to load your cart with the most expensive products you could in the time allotted. In the end the total value of the items determined the winner. In their zeal, some contestants would indiscriminately pile stuff into their cart willy-nilly. While they may have taken pride in their ability to finish first, they would inevitably lose to the smarter shopper. The winners would often sacrifice speed for strategy. It wasn’t about quantity; it was about quality.
Like the misguided contestants, some traders purchase stocks without much thought as to their quality. Such an approach simply adds to the difficulty of the process and diminishes the odds of profitability. One group of stocks of particular low quality are those of the holy variety. Not those that have been anointed by some trading priest mind you, but rather those like Swiss cheese. They are literally filled with holes, littered with gaps.
In other words, the stomping grounds for the Gap Robber.
The bulk of these so-called holy stocks are likely American Depository Receipts (ADRs) and Exchanged Traded Funds (ETFs) which must of necessity gap to compensate for any after-hours movement that has occurred in whatever security or securities they track.
Take China Mobile Ltd (CHL) or Posco (PKX) or Toyota Motor Corp (TM) for instance. All are gap addicts bent on making a mess of their charts.
If you insist on trading these types of securities keep in mind they are better vehicles for either day traders or those with long time horizons. The preponderance of gaps makes the life of a swing trader quite difficult.
For related posts, readers can check out:
Shopping on Wall Street
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