16 Juli 2013

Understanding the trading halts day trading strategy

There are many day trading strategies and one that does not get much discussion is the trading halt strategy. The "trading halt strategy" is a day trading strategy that is used to indicate a buy long or sell short signal for investment opportunities that can take advantage of the substantial increase in volume and volatility of stocks with pending material news to generate extraordinary returns.

Day traders may place side bets as part of their trading strategies, using options to try to make quick gains on short term movements of a stock while the market tries to determine the long term trends of stock. For example, it is common that a material event may lead to a trading halt in stock. Most of the time the event is already announced by a company but the outcome whether positive or negative is not known. This occurs in biotechnology regularly where a company has completed a drug trial and is about to announce the results. It also occurs in the mergers and acquisition arena where there is a rumor that a company is in play to be acquired but prior to the announcement of an agreement to be acquired the stock of the company is halted. The stock of the company is halted prior to the announcement of the material news by the stock exchange in order to maintain a 'fair' and orderly trading market in the stock.

If the event has been pre-announced by a company then prior to that announcement that leads to a stock halt, day traders are in the market taking positions based on the expectation of a favorable or unfavorable outcome of the event. This is a short term event that usually leads to a significant increase in the volatility of the stock. The day trader's goal is to turn a quick profit shortly after the announcement. Timing is essential so it is critical to find out what stocks are halted and why so a day trader can determine if there is an opportunity to make a quick profit after the stock trading halt is lifted. What the traders are typically counting on is that the market will over react one way or they other depending on the outcome of the event that is disclosed after the trading halt. Since the market tends to over react to news, this means that prior to the results being announced there should be a short term spike or decline in the stock price with significantly increased liquidity in the market for the stock. Very shortly after the spike or decline, the trader will unwind their position at a profit. Since there is substantial liquidity because there are many people trade on the news, there is an opportunity to take significant positions without the concern that they will not be able to exit those positions or that the exit of position in the stock will affect the stock price.

There are several services that may assist a day trader in finding these opportunities. Some are paid services and some are free service with realtime or near real-time email or text message announcements of stocks that have become halted. As a day trader, the key task is getting in the position take advantage of the stock trading halts. Clearly some research and guts are necessary to take a bet on material non-public news before it is announced.

J.K. Wright is the founder of Prior to founding the Trading Halts news service, he was a corporate finance lawyer and has been a C-Level executive at several publicly traded companies. He has a law degree from Columbia University.

Keine Kommentare: