Playing the Opening Gap

[Soultrader 12]

For alot of traders the opening gap is one of the favorite setups to take. Gaps will usually close in the same day, if not they do not remain opened for long.

 

I also like to play the gap fade setups ONLY if market internals and tape support it. Lately the morning gaps on the index futures have been runaway gaps only to rally in the afternoon and fill the gap. Here are my criteria for gap plays:

 

1. If a market gaps down, in order to fade the gap the TICK's must open up positive.

2. The tape must show strength and the majority of the sectors must not be red.

3. Premarket volume on SSF must not be high.

4. I always note the closest line of resistance. For example, if price gaps down right below a daily pivot it must break above it to initiate a long. This can be a VAH or VAL pivot as well.

 

For fading gap ups.

 

1. If a market gap ups, I prefer TICK's to open below zero. However, this is not always the case even on down days. Therefore, TICK's may not open above +600. In the first 5 minutes, the TICK must mark a short term high and trend down.

2. The tape must show weakness.

3. Premarket volume on SSF must not be high.

4. Look for any significant area of support before shorting.

 

Criteria on runaway gaps:

 

Gap downs -

 

1. If the market gaps down and the majority of the sectors are red, I will pass on the gap fade. Instead if price gaps down below a key pivot with TICK's opening below zero, I will go in the direction of the gap.

2. Premarket SSF volume is something to keep in mind but not as important.

3. This is not to say the gap will remain unfilled. This is just an opening play and the markets may in fact rally in the afternoon to fill the gap.

 

Gap ups -

 

1. If the markets gap up and the majority of the sectors are green, I will pass on the gap fade.

2. When the markets gap up, I keep a careful eye on premarket SSF volume and any premarket price action.

3. Tape must confirm this gap.

4. I like to wait for a test on tape. In other words, I wait for the pop down. Usually price will run down by around 10 ticks then pop back up.

 

Stops & Targets

 

Every trader has their risk tolerance per trade. I personally use a fairly tight stop on this setup from 10-15pts. My targets are usually +10, half a gap fill, and final target being a few ticks before the gap fill.

 

Half a gap fill is usually a good target to book a portion of your profits. If the opening run can not go and fill the gap, this half way line can act as a temporary pivot. Gap fills will also act as an pivot at times forcing price to stop dead in its track and reverse.

[notouch 10]

What do you mean exactly by the majority of sectors being red or green? I think I know what you mean but maybe you could clarify that. Also what's the value of using SSFs instead of ES or YM (or whatever ) volume. SSF volume is very low so I would have thought ES volume would be a better because it's the grandaddy of volume.

[Soultrader 12]

What do you mean exactly by the majority of sectors being red or green? I think I know what you mean but maybe you could clarify that. Also what's the value of using SSFs instead of ES or YM (or whatever ) volume. SSF volume is very low so I would have thought ES volume would be a better because it's the grandaddy of volume.

 

Im just posting some of the criteria that I personally use. Each trader should have their own criteria. By premarket SSF, look for any sign of unusual volume. Do you keep track of the average volume of several SSF's? Would you be able to recognize any sign of increase in average volume? If not, you might want to pay attention to it. I also do not understand why you want to look at ES premarket volume to play a gap trade on the YM. Maybe you have other methods that I do not use.

[notouch 10]

No need to get defensive ST, I'm just adding a bit of friendly discussion.

 

Do you mean the SSFs of the DOW 30 stocks? It seems to me that volume is too light on these contracts to really give us very useful information. I would have though YM premarket volume would be more reliable. ES is good because the DOW 30 is a subset of the S&P 500 and YM almost always moves in tandem with ES. ES volume is much higher so probably more reliable (no one trader could cause an abnormal volume spike on ES, unlike YM or SSFs).

[weiwei 10]

Here is my 2 cents on gap.

 

1. up day, up day and gap up, or down day, down day then gap down. fade it

 

2. If there is afternoon strength yesterday, then gap up, then I do not fade it and start to look for sign of a trending day.

 

On 1. this is from Linda Rashisck, and the way that I use it is to measure the current swing with last swing. If the pass 2 to 3 days put in a nice swing that is close to last swing, then it gap up big or gap up and run up. and when it is hitting on a important SR level, when that the risk reward is good, I will start to look for sign of weakness. Usually on ER2 more then 4 points and on YM more then 40 points is what I look for. It dose not happen a lot, but when it happen, it is usually very reliable.

 

on 2, after those Index markets have been beat down for 2+ days or in range mode for 2 day+, then if a rally came on the afternoon with nice volume and steady up. (like today).

 

I perfer a V shape and close at swing high, in other word, showing strength into the close. Then if there is a gap up, I then start to look for sign for a trending day. Or at least not to fade the gap.

 

weiwei

[Soultrader 12]

Do you mean the SSFs of the DOW 30 stocks? It seems to me that volume is too light on these contracts to really give us very useful information.

 

I personally pay close atention to the following SSF's: KLAC, AMAT, NVLS, and MXIM. Some SSF's are traded more actively premarket than the others. I keep an eye of the SSF's that are never active premarket but shows significant increases in volume.

[notouch 10]

Those are NASDAQ stocks. I see you're following John Carter's set-up but he recommends following the actual stocks (NASDAQ stocks can be traded pre-market) rather than the SSFs. If you are going to look at SSFs I would have thought Dow 30 stocks would be more useful. Just a helpful suggestion...

[Soultrader 12]

Well... whatever works. I am pretty familiar with what gets traded actively and what doesnt on the SSF's. I am able to spot any changes instantly premarket.

[wrbtrader 10]

There are hundreds of different ways to trade GAPs at the Open and it really comes down to your trading style along with what works and doesn't work.

 

Also, I see a lot of statistics thrown around at other discussion forums about GAP fills and you really need to be careful about these statistics because they may not apply to your particular trading instrument nor apply to the current market environment.

 

Simply, if your the statistical type...do your own stats involving your trading instrument.

 

With that said, my main strategy for trading GAPs at the Open is that I don't use a strategy specific for GAP trading.

 

Thus, I stick to my normal trading plan for my entry signals (regardless if there's a gap or not).

 

However, if there is a GAP for a particular reason, I will manage my exit (profit target) differently than I would for a normal trade via WRBs.

 

First of all, you must know what caused the GAP to give the trade context.

 

If I can't find the cause or don't understand it...I exit my trades normally without any consideration to the GAP.

 

For example, here's a trade not taken by me but taken by someone else via almost the same way I trade GAPs.

 

Take a look at the 2min regular chart for Nasdaq 100 Emini NQ futures on March 28th Wednesday at the Open.

 

NQ open as a big down gap around Tuesday around 1799.50 in comparison to its closing price on March 27th Tuesday at 1810.25

 

That's a 10.75 points as a down gap.

 

Lets find the cause of that 10.75 gap.

 

Go back to March 27th Tuesday around 4:50pm est there's news (market concerns) about the geopolitical about Iran the cause the NYMEX Light Crude Oil CL futures to spike up $5 (investors on the edge about Iran)...

 

This sent the Emini Futures sharply downward in the globex overnight trading session.

 

Here's the first key price movement...a Dark WRB formed via NQ's 2min all session globex chart at 4:52pm est.

 

This Dark WRB has a body range of 1809.25 - 1808.50

 

Next, there's a bigger Dark WRB spike downward on more volatility at 4:54pm est.

 

This Dark WRB has a body range of 1807.75 - 1797.50

 

Regardless to the size of the consecutive Dark WRB's...the first Dark WRB gets designated as the key s/r zone because its the first Dark WRB to react to the market news.

 

Thus, the key s/r zone is 1809.25 - 1808.50

 

I'm also implying here that if your going to trade GAPs directly or indirectly, if you find the cause of the gap, that means you need to monitor both the regular session chart (9:30am - 4:15pm est) and the all session globex chart (includes regular hours and the overnight trading session).

 

Fast foward to March 28th Wednesday, we now know the context of the GAP.

 

We also need to keep an eye on NYMEX Light Crude Oil CL futures or any other key Oil trading instrument or Oil Index because the context of the GAP is directly related to Oil.

 

Also, a trader that ignores intermarket analysis when the price movement in your trading instrument is caused by another key trading instrument...

 

That's a trader trading with one arm behind his/her back (we can debate about this in another thread).

 

Getting back to NQ Emini futures.

 

NQ gapped down at the Open and while there's a lot of downside pressure on Oil at the same time.

 

That downside pressure in Oil relaxes a little when Oil has a shift in supply/demand that can be visibly seen by White Hammer lines in different Oil markets 2min - 5min charts around 09:40am est.

 

This allows NQ and other Emini futures to counter-thrust upward and attempt its first GAP fill.

 

Oil then retraces back downwards (retracing the White Hammer line) to produce another shift in supply demand.

 

This halts the counter-thrust rally in its tracks for NQ and other Emini futures.

 

Next, there's the 10:30am est EIA Petroleum Status Report and with concerns about Iran.

 

In addition, there's the 1030am est FED Chairman Bernanke speech that caught many retail traders off guard due to the fact some sources had the speech time at 0930am est.

 

You combine Iran concerns, Oil and Bernanke...no technial analysis is needed to know that there will be an extreme volatile price movement.

 

It dropped big time.

 

Then around 10:42am - 1046am est...Oil halts its parabolic decline and many different Oil trading instruments put in valid Bullish Hammer patterns.

 

Thus, any trader getting Long signals in the Emini futures for whatever reasons between 10:40am - 10:46am est...

 

This will be the first real attempt at a change in supply/demand that could decide to close the GAP.

 

I had several different bullish signals in this time duration (10:40am - 10:46am est) and I'll mention one I'm sure many can relate to.

 

Take a look at your 5min chart of the NDX.X Index.

 

A Bullish White Hammer pattern closed at 1040am est and at that same time...

 

NQ Emini futures was at 1794.25 via the 5min chart.

 

Tough trade to psychologically take especially after watching the big price drop in NQ.

 

However, getting back to the 2min chart key s/r zone...the 5min chart valid bullish pattern signal serves as a warning to look for the real entry via the 2min chart.

 

Once again, we go back to intermarket analysis considering we know what's really leading NQ on this particular trading day at this particular time (will be different on another trading day).

 

The bullish reason to get into the Eminis occurred via the same bullish reasons in Oil. However, I'm not talking about price correlations, I'm talking about knowing what is causing NQ to do what it is doing...the real story and not the technical story...

 

Understanding the price action.

 

NQ price at 1046am est is 1791.50 and the key s/r zone (profit target) is above at 1809.25 - 1808.50 (a minimum reward of +17 NQ points).

 

Further, without "intermarket analysis", this long signal would have been psychologically tough to manage due to the fact it occurred after a parabolic price drop...

 

Most traders would have been on the sidelines watching or do a later entry or assume there will be no attempt at a GAP fill because they would have been concentrating their efforts on the possible fill in the first 30mins of trading.

 

Also, in one of my first post here at Traderslaboratory I talked about there's are times of the trading here where you will know with high probability the direction of the price movement via repetitive tendencies about the markets.

 

http://www.traderslaboratory.com/forums/f34/trend-day-confirmation-1457.html#post8215

 

This is one of those times of the year and it relates to breaking news events the day before a EIA Petroleum Report involving Oil (it happens more often than you think...enough to make some consistent big profits).

 

Yet, this didn't turn into a trend day after 1045am est but that wasn't the goal nor should we be concerned about such because our priority is the first goal of the trade and if a trend day develops...that's ok too (it didn't).

 

The goal was that key s/r zone 1809.25 - 1808.50

 

NQ moves upwards and then plays a cat & mouse game between 11:10am - 12:02pm est on low volatility.

 

More importantly...contracting volatility and NQ at 12:02pm est is at 1795.25 or about +13.25 points away from the profit target zone.

 

Well, we all know what happens when volatility contracts...it will expands.

 

NQ volatility picked up until it reached a high of 1809.00 at 12:26pm est.

 

At this point its time to exit the Long position because the price is now in that key s/r zone caused by the breaking news event back on March 27th Tuesday...

 

The same news event that caused the price action to be a Down GAP at the Open for March 28th Wednedsday.

 

Ok...so the profit target is reached...what about the GAP fill?

 

I mean, should you have stayed in the trade to attempt a GAP fill.

 

The answer is NO because the odds began to drop there's further price movement when a breaking news key s/r zone is reached.

 

Yet, if you are the greedy type...you could have exited most of your position if your trading multiple contracts (NQ) or shares (QQQQ) and left a few on the table with a tight trailing stop to see if you can catch a GAP fill.

 

Simply, your remainders should be managed for a completely different reason that's associated with the GAP fill.

 

Anyways, NQ didn't fill the GAP but it still reached its profit target of filling in the s/r zone of what caused the GAP.

 

I also have a rule of thumb in that once I've had a trade that reached its profit target via filling in the s/r zone of the cause of the GAP...

 

I no longer consider the cause of the GAP as a profit target because that goal has been fulfilled.

 

Thus, I go back to my normal WRB profit targets.

 

Therefore, some traders look for trades to fill in the GAP itself.

 

I prefer to find the cause of the GAP and then look for trades to fill in the key s/r zone caused by the key market event instead of the GAP itself.

 

Once again, I did not take this trade on March 28th Weds 2007 but I do know others that did from the Long signal to the Key S/R Zone WRB profit target.

 

P.S. Don't confuse my above long winded message into thinking this type of Trading the GAPs is complicated because it's not difficult nor does it require a degree in rocket science.

 

Just remember that the market is much bigger than NQ or any other Emini Futures.

 

Mark

(a.k.a. NihabaAshi Japanese Candlestick term

[brownsfan019 17]

Here's my 2 cents - if trading futures, I use an 'around the clock' chart setup with VBC's. By doing so, gaps are not a consideration for me. Not sure if that's good or bad or indifferent, but I'd rather trade my 'normal' setups vs. trying to play a opening gap specific strategy. I'm not saying those don't work, b/c they do if you know what you are doing. Simply, for me, trying to implement a gap strategy, an opening strategy, a 15 min strategy, etc. etc. was not profitable enough for me to spend considerable amounts of time focusing on.

 

By implementing a VBC chart on a 24 hour timeframe, all these 'extra noises' are not a factor to me. Again, that's not to say don't bother researching them, but in the spirit of keeping things simple, I simply look for my setups regardless of this other stuff. As you can tell, Mark is extremely intelligent and has done years and years of research on this and many other topics of trading. I don't know if I don't have the smarts and/or the patience to perform that kind of research, so I have chosen to not look for specific strategies based on the time of day.

 

FOR INFO ON VBC'S CLICK THIS LINK: http://www.traderslaboratory.com/forums/f34/volume-based-candles-how-profit-1414.html

 

FOR INFO ON WRB'S CLICK THIS LINK: http://www.traderslaboratory.com/forums/f34/wide-range-bodies-big-candles-1480.html

[walterw 10]

I personally pay close atention to the following SSF's: KLAC, AMAT, NVLS, and MXIM. Some SSF's are traded more actively premarket than the others. I keep an eye of the SSF's that are never active premarket but shows significant increases in volume.

 

Hi, could someone tell me what SSF stands for ? thanks Walter.

[Blu-Ray 10]

Hi, could someone tell me what SSF stands for ? thanks Walter.

 

Walter

 

It stands for Single Stock Futures

 

Blu-Ray

[walterw 10]

ok I see, so he looks at the future of that particular stock ?... am I right ?

 

Soul can you repeat the interpretation with (maybe) a chart example of this ssf pre market volume on a gapping day?.... very nice detail there.... thanks Walter.

[Nick1984 10]

Extension of your question Walter. How do you choose your stocks for the SSF? I mean do you just pick the biggest movers n shakers which are likely to effect the rest of the market? I'm unfamiliar with the stock codes James pointed out before (Aussie Markets here) if someone could shed some light?

[darthtrader 10]

i took notes the other day on that CBOT video with KLAC MXIM NVLS AMAT.

 

playing GAPS-

KLAC MXIM NVLS AMAT

pre market

less than 30k 90% probability gap will fill

30-80k 80% probability gap will fill. 90% probability half the gap will fill

Take half off when half gap fills

 

80k+ 30% probability gap will fill, use breakway gap signal

10k on ES, 2k on YM

tuesday wed thurs, better odds than mon/friday

 

 

i did not quite understand why to look at these 4 stocks but it sounded like an interesting idea.

[Soultrader 12]

Heres a list of all the SSF's from OneChicago: OneChicago - SSF Listing

[bakrob99 11]

i took notes the other day on that CBOT video with KLAC MXIM NVLS AMAT.

 

playing GAPS-

KLAC MXIM NVLS AMAT

pre market

less than 30k 90% probability gap will fill

30-80k 80% probability gap will fill. 90% probability half the gap will fill

Take half off when half gap fills

 

80k+ 30% probability gap will fill, use breakway gap signal

10k on ES, 2k on YM

tuesday wed thurs, better odds than mon/friday

 

 

i did not quite understand why to look at these 4 stocks but it sounded like an interesting idea.

 

FYI ...

Those are John Carter's Gap Fill rules. They are subject to modification/change over time as the key stocks may change.

[notouch 10]

I doubt even John Carter is trying to short all the higher opening gaps that appear in this market right now. It's silly to fight a megatrend.

[Soultrader 12]

I doubt even John Carter is trying to short all the higher opening gaps that appear in this market right now. It's silly to fight a megatrend.

 

I agree. Alot more runaway and breakaway gaps at the moment.

[dalby 10]

today's gap was AWESOME.

 

maybe i'm lucky but---

 

i faded it right down to the pivot then went long. i have noticed on a of gaps, that they will fade at least to some key reference area.

 

on a lot of these up gaps, you can get a fade at least to that level.

 

and of course, i agree about TICK (and i use advance decline as well)