Tactics are all-important when considering short-term trades, especially when dealing with components as volatile as GameStop’s [GME] share price. Mish Schneider has revealed her personal tactics for dealing with such stocks.
Short squeezes and high-risk trades have been all the rage in the media recently, with stocks like GameStop’s share price and Bed Bath & Beyond’s [BBBY] share price flying up to unthinkable daily prices.
But how could you tackle a short squeeze if you think a company is being targeted by a large amount of buyers?
First, let’s makes sure we understand what a short squeeze is and why they happen.
A short squeeze happens when a gap up or abrupt move higher takes place in a security with high short interest, forcing traders that had previously taken a negative position to buy back their shares for a loss, thus creating a large amount of upward pressure as panic buying takes place.
The large upward price move forces even more short sellers to liquidate their positions resulting in a short squeeze.
Ideally, the stock would also be a low float stock, which means the security has a low number of shares available to purchase.
This can increase the potential squeeze as buyers fight to buy a limited number of shares.
So how could a trader react to a potential squeeze?
Ideally, they would already be in the trade and be taking profits as it runs higher, but if not and they still wish to participate, they could make a very quick or active trade using a rule developed to take advantage of short-term momentum.
The 5-minute opening range
The opening range was developed in the days of trading on the floor of the commodities exchange.
Traders (Keith Schneider, Geoff Bysshe and I all excelled at this) would use this simple method to decide whether to enter a trade or let it pass.
It works by taking the first five minutes of the stock’s opening price, then buying the stock or security if it breaks the high of the five-minute range for two consecutive minutes.
You can see this done in the chart above.
This gives traders a clear method to watch if momentum is breaking to the upside or the downside. They can simply stop themselves out with a small loss if the share price breaks the 5-minute opening range low.
While nothing is perfect, this method could remove traders from some nasty morning selloffs, while still participating in some great movers like Bed Bath & Beyond on Tuesday. It may also help traders avoid getting hurt by things like the fake out in Beyond Meat [BYND].
This article was originally published on www.marketguage.com. With over 100 years of combined market experience, MarketGauge's experts provide strategic information to help you achieve your investing goals.