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Soultrader

Trading Pyschology and Opening Gap with Leroy Rushing

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Chat seminar with Leroy Rushing, a former Excecutive Risk Manager for several Fortune 500 financial insitutions and a current day trader and trading mentor for Trading Everyday.

 

Leroy: Today, I have been invited to review some trading concepts and ideas around Trading psychology and trading the morning open

 

Leroy: I want to start with the trading the moring open and then apply the trading psychology as we go

 

Soultrader: good to have you here Leroy

 

Leroy: Thanks

 

Leroy: For aggressive traders, the morning gaps are a great opportunity to look for trade setups that have created an imbalance in what some refer to as supply and demand

 

Leroy: Lets look at one of my favorite high flyers, GOOG

 

Leroy: http://www.traderslaboratory.com/Pictures/GOOG.jpg

 

Leroy: One of the most important assests a good trader can have is a great trading library

 

Leroy: Notice the small chart first. Post market after GOOG annouced earnings, there was a sell off

 

Soultrader: bottom left?

 

Leroy: bottom left

 

Leroy: a 5 min chart started to present higher pivots in post market

 

Leroy: GOOG continued to trend upwards and closed the post market near the prior days high (blue dash line)

 

Leroy: Notice the pre market, there was a small pullback and 30 min before market open, GOOG rallies to new high

 

Leroy: So now, lets look at the bigger chart. GOOG gaps up, immmediated starts selling off. After 2 consecutive down 5 min bars, GOOG retest the prior days low (orange dash line)

 

Leroy: GOOG pulls back on a shall bounce and test the 20 MA

 

Leroy: everyone following?

 

Soultrader: yes

 

Tingull: yes

 

Blu-Ray: yes

 

Leroy: I marked off the 15 min highs and lows (dashed light blue lines)

 

Leroy: the first entry areas provides a little risky trade. but if your RR and share size are managed accordingly, no problem

 

Soultrader: what was the criteria for the first entry before the test of the previous day low?

 

Leroy: GOOG then crosses its 15 min low and prior days low and there is a nice profit (shaded red box) for 4+ points

 

Leroy: Gap up, close gap, pull back on declining volume, (1) 5 min bar reversal

 

Leroy: GOOG is now below the 20 and 200 MA

 

Soultrader: ok thanks

 

Leroy: after the first entry, GOOG provides a pull back during the duldroms again on low declining volume (see magenta lines)

 

Leroy: A second entry occurs after, GOOG re-test its 15-minute low area, forms a lower high

 

Leroy: Again, nice profit target area of 8+ points

 

Leroy: So trading GOOG with good risk and money mgmt rules would have provided a trader with a days profits

 

Leroy: everyone agree?

 

budman: yup

 

Blu-Ray: yes

 

Soultrader: yes. do you always use the 15minute high/low as support and resistance?

 

Tingull: yes

 

Leroy: So if we look at the trading psychology here, traders were anticipating earning movement, which you see in post and pre market

 

Leroy: Waiting to see once the market open, would have allowed more experienced traders to see who was being trapped

 

Leroy: after the 15 min low is crossed, majority of the traders from pre market are on the wrong side of the trade

 

Soultrader: so were the shorts being trapped premarket?

 

Leroy: Only the professional really know, but my guess is that they ran it up in premarket to bring in the buyers, only to sell

 

Soultrader: i see

 

Leroy: see the volume in the first (2) 5 min bars, thats 1 million+ shares at $490+, a lot of hamburgers

 

Leroy: Questions so far?

 

Soultrader: so far so good here

 

Tingull: sounds good

 

Leroy: Far the less agressive traders, lets look at another stock

 

Blu-Ray: Would you always take the trade of the break of the 15min low?

 

Leroy: http://www.traderslaboratory.com/Pictures/GILD.jpg

 

Leroy: Blu-Ray, I use several time based strategies, 5 min, 6 min, 15 min, 30 min and 60 min to look for morning momentum trade setups

 

Blu-Ray: ok cheers

 

Leroy: Because GOOG can provide good movement, I look for my daily profit targets in any stock or combination of stocks

 

Leroy: So, if you have a little tally sheet, and you traded GOOG for a few points your up for the day so far

 

Leroy: Let see if we can add to the tally sheet for a days profits

 

Leroy: Here is another 15 min based trade setup that we can review. GILD gaps up strongly from the prior days close. Notice the prior days high far away

 

Leroy: we can mark off our 15 min highs and lows. Notice the price action for GILD above the 20 and 200 MA

 

Leroy: everyone with me so far?

 

Tingull: yes

 

Blu-Ray: yes

 

MrPaul: sure nuff

 

Soultrader: yes

 

Leroy: notice the flag pattern again on declining volume after crossing above the 15 min high. We have a long entry signal which gives us a nice 1 point move

 

Leroy: So if we add that profit to our tally sheet we should have a good days profit

 

Leroy: Some traders use momentum indicators to buy and sell. Notice the shaded box on the stochastic

 

Leroy: everyone see where I am?

 

Soultrader: y

 

rock: yep

 

budman: yes

 

Tingull: yea

 

Leroy: The stochastic would not give an entry signal since it is indicating oversold. The RSI as an example, would have potential given a signal for the long entry, but more trade entry criteria would be probably needed to justify the trade

 

Leroy: So lets look at the trading psychology of this trade.

 

Leroy: Can anyone tell me if traders were shocked by the gap up?

 

budmanyes

 

budman: big time

 

Win: yes the huge volume at the open

 

LeroyGood catch

 

Soultrader: wouldnt that indicate market orders before the open?

 

Leroy: So, volume can be a good indication for how a trade can start to move in or against you

 

Win: taking all offers that are out there to cover shorts

 

Leroy: Gaps usually indicate a change in supply or demand

 

Leroy: Good Win

 

budman: trap

 

Leroy: Some traders have a tendency to be either GREEDY or have ?

 

Win: so in this case a lack of supply?

 

Leroy: The prior chart on GOOG shows the emotional status of traders very good. What was the market direction like yesterday?

 

Tingull: sideways

 

Leroy: So when the market direction is trending and the gapping stock is also trending in the same direction, you are following the trend

 

Win: so go with the gap?

 

Leroy: Well, Win, there are several combinations of when stocks gap. Lets look back at GOOG for a minute

 

Win: but the main indicator to focus on is volume.

 

Leroy: Stock gaps up, if you went long, you took some serious heat, and could not get out without some pain potentially, right?

 

Soultrader: yea

 

Leroy: Notice GILD gaps up, sell off a little, you get the 3 bar reversal that starts to trap traders. GOOG traps traders on both sides

 

Soultrader: what is a 3 bar reversal?

 

Leroy: first bar on GILD is a topping tail, second bar is a small range bar, third bar engulfs prior bar

 

Soultrader: ok

 

Leroy: Those traders using a fade the gap strategy have their stops at the high of the day (70.50)

 

Win: those 3 red bars in the bear flag

 

Leroy: As soon as that area is breached, they start getting nervous. Thats selling on small volume, see the white declining line

 

Win: hence the small increase in volume on the break of 70.50

 

Leroy: yes, in comparision to the prior volume, you got it. Today, we mention RACK, did anyone see that?

 

Tingull: wasn't watching it unfortunately

 

Soultrader: no

 

MrPaul: nah i didn;t watch it realtime Leroy

 

Leroy: Next time, Tingull

 

Leroyhttp://www.traderslaboratory.com/Pictures/RACK-1.jpg

 

Leroy: If you look at your daily charts, you will see that RACK was a bull trap. Hence, some trading strategies suggest get in immediately at the open

 

Tingull: wow

 

Tingull: that was an intense drop from 32ish. If you waited for a 5 min high and low stategy, you missed a big portion of the move, and if you waited for a 15 min strategy the profit is almost none.

 

Leroy: So using a little tally sheet everyday, you can try to add up your trade profits to reach your daily goal

 

Leroy: A $17 stock with good share size and risk mgmt is a low risk trade for some traders, and it has good volume, right?

 

Soultrader: yes

 

Leroy: Everyone with me?

 

Robert: y

 

Tingull: yes

 

MrPaul: yea

 

Robert: intently

 

Leroy: So lets list some criteria that can help with trading gaps. Look at the pre-market direction, like we did with GOOG

 

Leroy: Look at the first 3 consecutive bars

 

Leroy: Look at the price action direction using your favorite tools like Moving averages. See if the gap a compelling pattern, that traps some traders. Look for areas of support or resistance for targets and scaling in or out. Look for pivots to see if the stock is gapping above/below them

 

Leroy: A nice little trick is to ask, are a lot of traders already profitable

 

Soultrader: good point

 

Tingull: breaking even all the time, with teeny bit on the profit side.

 

Leroy: Profit taking. If so, they probably are thinking what?

 

Leroy: When stocks fade the gap, look to see how much it retraces

 

Win: ring cash register...

 

LeroyWould you like to see another example?

 

Soultrader: yes

 

Robert: sure

 

Win: if it fills all the way, that means they were taking profits with not many order to fill so they end up reducing their own profits by getting out

 

Leroy: So what do you think so far? I will pull one from my library, hold on

 

Win: and if that happens, there is a good chance the gap will act as a pivot and continue higher?

 

Soultrader: win can you explain that?

 

Tingull: good stuff

 

Leroy: This next example is for the most agressive traders, its on a 2 min chart

 

Leroy: http://www.traderslaboratory.com/Pictures/PPDI.jpg

 

Leroy: It rallys to fill the gap. So, PPDI gaps down at the open

 

Leroy: we get a 3 bar reversal at the prior days low. Price action is below the 20 and 200 MA

 

Leroy: Once PPDI crosses below the 6 min low 35.60, notice how it pulls back and retest it. We get a second short entry

 

Leroy: Using my little tally sheet, we get atleast 1 point (days money)

 

Soultrader: you use a 15minute and 6min high/low?

 

Leroy: I use a lot time based strategies

 

Soultrader: ok

 

Leroy: everyone still there?

 

Leroy: We get the bottoming tail, and after waiting, we start getting higher lows and pivots for a trend reversal

 

Tingull: :)

 

kingking: yes

 

Robert: y

 

Leroy: So where I marked the higher pivots, could have been long trade signals for another days money, cha-ching

 

Win: doesn't that bottoming tail with lower volume give clues, ie no more big selling ;)

Win: and a reversal may happen

 

Leroy: After PPDI crosses back above its 6 min low, all the traders who went short and didn't cover or on the wrong side. Notice the flag pattern on declining volume?

 

Soultrader: yes

 

Win: oh yeah

 

Leroy: After price action crosses above the upper resistance of the flag pattern, it also crosses back above the 200 MA, and another long entry is there if a trader wanted it

 

Leroy: Any questions?

 

Robert: I have so much to lean

 

Leroy: So if we review some of the trades on the charts, we can see that if a trader is agressive there were some good opportunity for a days profit

 

Robert: spelling is one

 

Robert: learn

 

Soultrader: hehe

 

MrPaul: haha

 

Leroy: Robert, it takes time

 

Robert: true

 

Robert: I was trading real but now I'm back to paper

 

Leroy: Did the suggestions above help any?

 

Leroy: If you can, look at ERTS today on a 5 min chart

 

Soultrader: yes very

 

Robert: gap up

 

Leroy: http://www.traderslaboratory.com/Pictures/ERTS.jpg

 

Leroy: Here is an example of a gap up and fill the gap type trade

 

Leroy: Notice after the 15 min highs and lows, the lower high

 

Robert: I would like to have gone from bar 6 up then 12 down

 

Leroy: Again, with good risk and money mgmt, there is a days money

 

Leroy: ERTS slowly sells off and crosses below the 15 min low 53.60

 

Leroy: Sometimes the reversal does not have strong volume behind it so you have to let it go, you win some, you lose some, Robert

 

Leroy: Once you got the lower high, and the market is not trending upward, it tough for stocks to go up on their own

 

Robert: How would you know to be watching ERTS? Or is that another lesson?

 

Leroy: Thats usually referred to as relative strength

 

Soultrader: yea lower highs , higher lows are powerful

 

Leroy: ERTS was on my gap list this morning Robert

 

Leroy: I review each stock and use those comments I mentioned above to see which one or more "potent" or have what I like to call "shock" value.

 

Leroy: I usually have gap list of up to 30+ stocks

 

Rober: tah, the trusty gap list :)

 

Robert: ...and review all of them before market I guess

 

Leroy: When traders go "ouch", you hope to be on the other side of their trades, from a trading psychology, these are some of the best trades you can make

 

Leroy: http://www.traderslaboratory.com/Pictures/gaplist.jpg

 

Robert: How many of these gaps would you play in a morning?

 

Leroy: Robert, here was my gaplist today

 

Leroy: I have 7 monitors, and several trading accounts that I load with strategies, everyday

 

Leroy: everyone still there?

 

Tingull: yes

 

Leroy: Any question before we rap things up?

 

Win: yes

 

MrPaul: here. but good stuff Leroy

 

MrPaul: in depth

 

Robert: I have a million questions but I know you have to go. Thank you for helping us!

 

Soultrader: yes great stuff

 

Win: now does this gap play apply to index futures where there are more "informed" players or do the general rules apply as well?

 

Leroy: No robert, I am available

 

Robert: Come back

 

Leroy: I have found that the rules work on anything, they need to be backtested, and adjusted

 

Soultrader: yes i am interested as well for index futures... i never quite applied time based strategies on the index futs

 

Leroy: For those interested, I posted an article on Trading Psychology from my website in the forum under Articles

 

Robert: OK then, is the gap list available on you site?

 

Robert: Noted

 

Win: great, will take a look, always trying to find head stuff to improve upon what I already understand

 

Leroy: I don't post trades to my website, but what I do is mentor traders on how to create the watchlist and gap list and we walk thru in detail how to build their strategies

 

Robert: Gotcha, more one on on mentoring

 

Leroy: There are numerous variations of the strategies for trading the open, I presented on a couple here. I will work with soultrader to comeback an do some more.

 

Leroy: Robert, I will do one more

 

Soultrader: Thank you for your time Leroy. Greatly appreciated

 

Robert: :)

 

Win: thanks Leroy

 

MrPaul: indeed

 

Leroy: I will post one more example, give me a minute

 

Soultrader: ok

 

MrPaul: thanks Leroy

 

Leroy: Here we go guys, one for the big guns

 

Leroy: http://www.traderslaboratory.com/Pictures/GS.jpg

 

Leroy: Here is an example of a 30 minute strategy

Wingoldman sachs

 

Leroy: Notice how the stock gaps up. We mark our 30 minute highs and lows. It crosses below the prior day high (blue dash line) on a weak pullback. It then crosses below the 30 minute low and consolidates there near the prior days high area

 

Leroy: Everyone with me?

 

sniper: yep

 

Robert: y

 

LeroySee the lower highs forming?

 

Robert: y

 

Soultrader: y

 

Leroy: We can start trading at the 30 minute lows with a marker lot (small lot of couple hundred shares or less) to manage the risk if we like

 

Leroy: As the volume continues to decline as the price action is increasing we get a D---------- ?

 

Robert: On the morning gap, does it usually have a pullback and then a continuation?

 

Soultrader: ivergence

 

Leroy: good. We can then take the lower highs as entry signals and once GS crosses below the ascending support, we get 2+ point sell off for a days money

 

Win: damn I suck at fill in the blank games :p Iwas gonna say a weak rally

 

Leroy: Notice the pull back to the 200 MA and then continuation of sell off

 

Soultrader: y

 

Robert: The down side is like throwing a paper airplane. It goes down, then glides up, then down, then up again, then falls.

 

Win: yes

 

Leroy: There are several trading styles that we reviewed today, so any questions?

 

Robert: It just lets me know I need to study some more.

 

Soultrader: sounds good Leroy. Thank you

 

Leroy: Notice GS sold off and trended towards the prior days low and crossed it and found some short term support

 

Robert: I guess these are gapping on news?

 

Leroy: Thank you all. I hope this was helpful to some of you, and I enjoyed the chat. I will coordinate the next chat with Soultrader so we can look at a few more trades and different trading styles such as swing trading.

 

Leroy: Any comments or feedback is greatly appreciated.

 

Robert: Sounds great! I'll be there.

 

Win: thanks

 

MrPaul: cool

 

kingking: thanks!

 

Soultrader: Thank you very much Leroy

 

Leroy: I can be reached at leroyrushing@tradingeveryday.com if some has questions or commnets. Thanks

 

Robert: How about you did a good job!

 

Soultrader: Thanks for putting this together for us. Great stuff!

 

Leroy: Robert, you rubbed off on me! (smile) questions or comments

 

budman: Thanks Leroy.

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