Five & Fifteen Minute Rules

When stocks gap up or down through or very close to stops, ShadowTrader uses what we call the “gap rule” to exit the position. In the same vein as the way that we often use price clearing first 5 minute or first 15 minute bars to determine “real” strength or weakness, we are not exiting positions on mechanical stops at the open because we know from experience that stocks often gap and reverse immediately and we don’t want a GTC stop to be unnecessarily triggered. The rule of thumb is this: If a stock gaps down below the stop that has been established, wait for the first 15 minutes (up to 9:45am EST) to trade before doing anything. Then place a new protective stop just under (adjust this amount for the volatility of the issue) the low of that first 15 minutes of trade. Reverse this entire scenario for shorts.
If a stock opens close to the stop but not below it and trades down through the stop within the first 5 minutes of trade, then we use the “5 minute rule”. Again, we are not out of the position on the original stop, but rather will let the stock trade for a full 5 minutes (until 9:35am EST) before taking any action. Once 9:35 has elapsed, we place our new protective stop just under (adjusting the amount for the volatility of the issue) the low made in that first 5 minutes of trade. Reverse this entire scenario for shorts.