May 22, 2014
- in Uncategorized by schooloftrade
Day Trading Gaps; SchoolOfTrade.com
In today’s day trading tutorial we will discuss a simple strategy for day trading the morning GAP.
The ‘Morning GAP’ refers to the “range between the closing-price from yesterday and the opening-price today.”
If prices move higher or lower in the overnight trading session there will be a GAP on your chart between yesterday’s closing price and today’s opening price.
Professional traders have noticed that there is a 81% chance that these ‘GAPS’ will be ‘filled’ the following day, which means there are plenty of opportunities for a new trader to profit if they use this simple day trading strategy.
Day trading the Morning GAP can be very easy if you know what to look for.
Step 1: Set-up your Charts to find the Morning GAP:
The first thing you need is a chart that shows you only the day trading session, when the markets are open and there is trading in the PIT.
Remember, these days most traders use a computer and trade electronically 24-hours a day, so this is going to be a different way of looking at your charts.
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Day trading with GAPs |
Ninja Trader allows us to use a specific ‘Session Template’ that will only show us the opening-bell to the closing-bell, which is ideal for trading the Morning GAP.
Use the following Session Times for these markets:
· Gold: 8:20am – 1:30pm EST
· E-Mini’s: 9:00am – 4:00pm EST
· Crude Oil: 9:00am – 2:30pm EST
· Bonds / Notes: 8:20am – 3:00pm EST
· Currency Futures: 8:20am – 3:00pm EST
Step 2: Find a GAP at the Opening-bell
After you set-up the correct chart for day trading the GAP, now we look for the opening-bell to ring and the opening-price shows a GAP between the closing-price from yesterday and today’s opening-price.
IMPORTANT: Be sure to measure the SIZE of the GAP, which is the range between yesterday’s closing-price and today’s opening-price.
This range should be larger than 50-ticks, which will ensure that you have enough reward for the risk you will take on the trade.
Step 3: Find the Entry into the Morning GAP Trade
For this example we will use a SHORT trade example, using a GAP-UP at the opening-bell.
Using a 5-minute chart, look for the first candlestick of the trading session to trade lower, with the ideal candlestick showing a large ‘wick’ (shadow) which suggests that the buyers tried to move higher, but failed to the strength of the sellers.
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Day trading with GAPs |
Wait for this first candlestick to close, and the entry SHORT is triggered 2-ticks below the lows of this first candlestick.
Step 4: Place your stop-loss and profit-target according to the GAP
After you enter SHORT with the Morning GAP day trading strategy you need to protect your capital with a stop-loss and lock-in profit with 3 profit-targets.
We will measure the range from the closing-price yesterday (CP) and the opening-price today (OP) to find the proper profit-targets.
Your stop-loss is placed 2-ticks above the high of the first candlestick of the trading session.
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Day trading with GAPs |
We will use three (3) locations for our profit-targets:
1. Profit-target #1 = 38.2% of the range from ‘CP’ to ‘OP’
2. Profit-target #2 = 50.0% of the range from ‘CP’ to ‘OP’
a. Move your stop-loss to point-of-entry when you reach the 2nd profit-target
3. Profit-target #3 = 100.0% of the range from ‘CP’ to ‘OP’
a. Move your stop-loss to the 50% (Target #2) when you approach 75% of the range from ‘CP’ to ‘OP’ which locks in profit to protect against a reversal.
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