The opening trade of a security
in which the opening price shows a significant increase or decrease
compared with that security's closing price of the previous day.
An opening gap occurs when the market begins the trading day at a
price other than where it closed at the end of the previous session,
resulting in a "gap" in price when viewed on an intraday chart. If
this discrepancy is unusually large, it is likely that new information
has entered the marketplace, and price activity will tend to trend
even further in the gap direction. If the difference between closing
and opening price levels falls within a more reasonable range, there
will be a tendency for the market to trade back into the gap area. The
strength of this tendency is indirectly proportional to the magnitude
of the gap. The narrower the gap, the stronger the tendency. Very
small gaps are not even tradable. Very large gaps are less likely to
close, and contain the potential to quickly move even further away
from the gap level, marking the beginning of a strong trend move.
These kinds of gaps are referred to as "Breakaway". On the other hand,
the kind of gaps that have a higher probability of closure, and the
sort that we are most interested in for the purposes of this article,
are referred to as "Common" gaps.
The Opening Gap Trading Strategy
When a stock or market gaps higher or lower at the open it is very
irritating to a trader who has planned their trades the night before
after scanning through hundreds of possible trading set-ups. Many of
us spend hours working to find the best set-ups from which to trade
and a morning gap can ruin these set-ups, at least temporarily.
There may still be a play, donít give up on those great set-ups yet.
We have a system that can capture consistent gains each day and we
post these day trades on our message board each day as we take the
Wait Nine Minutes
Fortunately for the patient trader, many novice traders still place
market orders before the open and walk away. Unfortunately for them,
this is the oldest sucker trade in the book and the market makers and
specialist feed off these market orders. These buy and sell orders at
the market on open deliver the worst fills imaginable. By holding off
and letting these sucker orders fill first, you not only have time to
plan your trade, but youíll get a much better price on your fill. The
extra few minutes is worth the wait.
As we have stated many times, you should never trade at the open. Just
stand aside and wait for three 3 minute bars to appear on the chart.
Use these three bars to find the range of the first 9 minutes of
trading. In most cases, by this time, the gap will have filled if it
is going to fill.
To enter this trade, we will wait for the stock to form the first
three three-minute bars, and then use the high and low of this
"three-bar range" as our support and resistance levels.
Our buy signal is generated when the price exceeds the high of the
three-bar range after a gap up. A sell signal is given when the price
exceeds the low of the three-bar range after a gap down. It's a simple
technique that works like a charm most of the time. The three bar
range reversal or breakout phenomenon has been proven to be a very
reliable entry for the patient trader.