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Three Ways to Trade the

Opening Range
Aug 15, 2016

Written by:
Al Hill

The most dynamic and active period of the trading day is the opening range. Since this is the most
volatile time frame during the trading day, we believe it deserves special attention from our side.

In this article, we will cover three methods for trading the opening range. After reading this material,
you will feel more confident when attempting to trade during a time when the market feels the most
chaotic.

Open Range Definition

The opening range is simply the high and low of a given period after the market opens. This period is
generally the first 30 minutes or the first hour of trading.
During this period, you want to identify the high and low of the day. In addition, you will also want to
account for the pre-market highs and lows, as these levels will often act like a magnet on price action
after the bell rings.

Since the opening bell is associated with big trading volumes and volatility, this time of the session
provides many trading opportunities. In this manner, traders use the opening range to set entry points
on the chart and to forecast the price action for the day.

Size of the Opening Range

The first thing you need to do before attempting to trade the opening bell is to measure its size.

When the market opens and you spot the open range of a stock, there will be two candles which will
help you measure the size of the range.

The first candle is the one which is last from yesterday’s trading session. The second candle is the
first one created when the market opens. To get the range size you need to take the high/low of the
yesterday’s closing and the high/low of the today’s opening candle. The distance between these two
prices is the size of the opening range. Now see how we measure the size of a range:

Opening Range

The image above illustrates an opening range. The black horizontal lines measure the size of the
range. The upper line shows the opening range high and the lower horizontal line is the opening range
low.

For a more conservative range, you could just look at the price action after the open, but this will
mask the inherent risk of trading a 15% gap for example. While the morning range could be pretty
tight in this scenario, if the stock decided to close the gap from the previous day, you essentially are
ignoring the fact there is 15% of space between your entry and the floor of the move.
Opening Range Breakout Calculator
The most important part of the opening range trading is the breakout from the range.

In many cases, the opening range breakout determines the further price direction. When the price
breaks out of the range, there is a big chance that the price action will continue in the same direction.
Therefore, in most opening range trading strategies traders use the range breakout to set entry points
on the chart.

Opening Range Breakout Calculator

This is a real opening range breakout. The size of the range is marked with the black horizontal lines
on the chart. The range breakout is located in the red circle. As you see, the price shoots up after the
opening range breakout.

Opening Range Trading Strategy

The stock market opening bell is a specific on-chart phenomenon, which can be approached in many
ways. Now that we have covered the technical structure, let’s dig further into the opening range
breakout strategies.

Strategy #1 – Early Morning Range Breakout

This is probably the most popular opening range success formula. The early morning range breakout
puts emphasis on the size of the gap, as well as on the breakthrough of its low/high. According to
this strategy, when we identify the boundaries of the gap, we need to trade in the direction of the
breakout.
One point to note is that breakouts later in the day should be taken with caution. Light volume and
skilled professionals is a cocktail I don’t like to partake in often. Therefore, pull the trigger when the
retail/inexperienced traders are most prevalent, which is in the morning.

You should always use a stop loss order when trading the early morning range breakout. The right
place for your stop loss would be the mid-point of the gap.

You should stay in your trades for a minimum price move equal to the size of the gap. However, if the
price shows symptoms to continue the trend, you can use price action rules to extend your gains or to
exit a position earlier than expected.

Early Morning Range Breakout

The picture above shows the 5-minute chart of Royal Caribbean, which exhibited an early morning
range breakout.

The opening range is outlined with the two parallel lines at the beginning of the chart. We enter a long
trade when the price breaks the upper level of the early morning range. The stop loss of this trade
should be located in the middle of the range.

Ten periods after we buy RCL, the price completes the minimum target which equals the size of the
opening range. However, the price increase continues and we stay in the trade for further gains.

Suddenly, the price begins to trade in a horizontal fashion. We close the trade when the price action
closes a candle through this support level.

Strategy #2 – Chart Pattern Gap Pullback Buy

The gap pullback buy is another popular approach for trading the opening range. However, this
trading strategy is applied only to bullish gaps.

When you spot a bullish gap on the chart, the price could immediately start moving contrary to the
direction of the gap.
This phenomenon is called a pullback. Since the gap is bullish, the pullback would be bearish.

The purpose of this trading strategy is to predict the end of the pullback.

The tricky part is knowing when to purchase the pullback. This can be done in many ways; however, a
simple way to get your feet wet is to look for a reversal candlestick pattern.

After identifying a reversal, wait for confirmation and then enter a long trade.

When you use this opening range trading strategy, you should use a stop loss order to protect your
trades. The proper location of your stop is below the lowest point of the opening range.

You should hold your trade for a minimum bullish move equal to the size of the gap.

Now, let’s do a review of a gap pullback trading opportunity:

Gap Pullback

You are looking at the 1-minute chart of Citigroup from June 15, 2016. The image illustrates a gap
pullback trading strategy.

As you see the chart starts with a bullish gap. Shortly after the open, the price begins to pull back to
the previous days’ close.

Then Citi prints a strong bullish candle, which engulfs the previous two, and we take a long position
with the anticipating the stock will make a new high.

Full disclosure, buying the pullback is my least favorite of the three strategies. This is because the
high has not been broken.

I can’t tell you how many times I have purchased the pullback only to have the stock rollover or go
flat.

For me, when I buy the high or sell the low, I at least know something is supposed to happen. Reason
being, there could be many traders that are looking for a certain level after a pullback, but it’s really
anyone’s guess which level will trigger a move higher.
However, everyone and I mean everyone knows the high and low for the day.

As you can see on the chart, Citigroup began a nice steady climb higher and got close to breaching
$43.

We exited the trade when the price action breaks its blue bullish trend line.

Strategy #3 – Gap Reversal

The gap reversal is another way to approach the opening morning range of a stock. We have a gap
reversal when the price creates a gap, but the range is broken in the opposite direction.

If the gap is bullish, we have a gap reversal when the price breaks the lower level of the opening
range. If the gap is bearish, we have a gap reversal when the price breaks the upper level of the
opening range.

The trigger of a trade with this opening range trading method is the breakout through the opposite
level. When you open your gap reversal trade you should also secure the trade with a stop loss order.
The right place for your gap reversal stop loss is again the mid-point of the opening range.

When you trade the gap reversal, you should hold the trade for a minimum price move equal to the
size of the gap. You could hold the trade further if the trend continues in your favor but again will
need to have a clear method for knowing when to exit the trade (i.e. time and sales).

Gap Reversal

Above is the 5-minute opening range breakout of Boeing from April 18, 2016.

The image starts with a bearish gap. However, the price action suddenly reverses and breaks the
opening range upwards. This creates a gap reversal pattern on the chart. Therefore, we buy BA the
moment the stock makes a new high.

On a side note, these are one of my favorite setups. Essentially, you have a pullback below the low of
the current day, which looks pretty bearish on the chart.
Only to have price perform a “v” move up through the high. This sort of quick impulsive move higher
traps the weak bears.

The price breaks may be short-lived, but if you are able to time your exit, you can make some pretty
consistent gains.

Time and Sales – My Way Out

My preferred off-chart indicator for trading opening ranges is the time and sales or the tape. The
action is fast of course, but the time and sales is the one tool that keeps me “safe” in the morning.
Every other indicator, leading or lagging, just isn’t fast enough and I would tend to get myself in some
tricky spots.

The point I’m trying to make is that you need some method or indicator for knowing when to get out
of the trade. The mid-point stop is just a last resort, but it should never be your only option.

Conclusion
1. To measure the size of the range you should take the distance between the:

High/low of the closing candle in the previous trading session

High/low of the opening candle in the new trading session

2. The most important part of the opening range trading is the breakout from the opening range.

When the stock breaks the opening range upwards, the price action is likely to continue in a
bullish direction
When the stock breaks the opening range downwards, the price action is expected to continue
in a bearish direction.

3. Three of the most popular opening range trading strategies are:

Early Morning Range Breakout – Enter a trade when the price action breaks out of the opening
range. Open the trade in the direction of the breakout. Place a stop loss in the middle of the
opening range. Stay in the trade for a minimum price move equal to the size of the morning gap.
Chart Pattern Gap Pullback Buy – Open a trade when the price action finishes a pullback after
the creation of a bullish gap. Confirm the end of the pullback with a chart pattern or a candle
pattern. Open a long trade – in the direction of the expected pullback reversal. Place a stop loss
below the bottom at the end of the pullback. Stay in the trade for a price move equal to the size
of the gap, starting from the upper level of the opening range.
 Chart Pattern Gap Reversal – Open a trade when the price action breaks the level of the
opening range, which is opposite to the direction of the gap. Open the trade in the direction of
the breakout. Place a stop loss order in the middle of the opening range. Stay in the trade at
least until the price action completes a move equal to the size of the gap.

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How to Day Trade Morning

Gaps – 3 Simple Strategies
Jun 29, 2019

Written by:
Al Hill

Morning Gap

A picture is worth a thousand words and nothing will wake you up quite like a morning gap!

The gap has the amazing ability to take the breath right out of swing traders and long-term investors as they
scramble to assess the pre-market and early morning trading activity.

In this article, we will discuss how to trade morning gaps on the open and how to take advantage of these
chaotic situations.

Morning Gap Definition

The morning gap is one of the most profitable patterns that many professional day traders use to make a bulk
of their trading profits. The morning gap is a byproduct of built-up trading activity that occurs overnight due to
an economic number, earnings release, or company-specific news event. [1]

Day Trading Morning Gaps

Let’s now go deeper into the structure of the gap. If you listen to some of the “gurus”, they will begin to
describe a host of gap types present in the market.

Like everything else on Tradingsim, we will take the simple approach when it comes to analyzing the market
and focus on two types of gaps – full and gap fill.

Full Gaps
We have a full gap when the price never breaches its prior day's close.

Full Gap

Gap Fill
A gap fill occurs when the stock gaps on the open but at some point during the day overlaps with the previous
day's close. [2]
Gap Fill QQQ

The majority of gaps do get filled at some point of the day. However, if a stock gaps really hard it can go days
and even weeks before ever filling its gap. These are also referred to as breakaway gaps.

Gaps are really fun to trade if you know what you are doing. Conversely, if you are out there just swinging for
the fences you can get your feelings hurt.

Gap Trading Techniques

Next, I’m going to list out 4 techniques I see at play every day and you can glean from them what you see fit.
Strategy #1 – Be Weary of the First Candle
The first 5-minute bar can tell you a lot about the strength of the stock. When I first started out I would just buy
the breakout on the first 5-minute bar.

At times this worked lovely and I would be able to grab the lion share of a 15-minute or 30-minute run on the
open.

King of the Market

This was the dangerous part in that I honestly believed each stock should perform like this on every buy. As
you know from trading, things don’t always work out as planned.

While I would land a few of these in a row, at some point the nasty reversal would come to smack me in the
face. Now, this is not a light smack, it is vicious.

For example, take a look at the chart below.

Ouch

The hardest part is that the smack in the face comes after you have had some success. So, if you do not have
a stop in place, this is where the hope comes into play as you are still living in the past.
So what to do?

I have learned to wait a little bit after the market to let the charts set up. I no longer rush out there looking to
get into a position quickly. So, at times I may miss one that runs, but it also allows me to avoid the pitfalls of
jumping in too early and then holding on for dear life as the stock drifts lower into the close.

The last thing I will say on this is that buying the first candlestick after the gap poses the challenge also of
where to place your stop. You can place it below the low of the candlestick and that works at times.

I would get into trouble if the stock closed near the low of the candle. I would freeze up because I needed to
get out, but that half a second hesitation would lead to losses on the day.

The other option you can take is to short this level of weakness when it presents itself in the morning. I don’t
personally take this approach, but see if it works for you.

Strategy #2 – Wait for the Flag

This is my favorite goto for the morning setups. I essentially wait for a stock to gap up and then I like to see
consolidation near the high. This consolidation should take place over 4 to 8 bars.

I also like for the stock to not retreat much into the strong gap-up candlestick. The last thing I like to see is for
the stock to stay above the 10-period EMA so that it’s clear the stock is still trending hard.

This for me presents a beautiful chart with clean candlesticks.

I then wait for the stock to make a run for the high of the day, but it has to do it between 9:50 and 10:30 at the
latest. Once you go beyond 10:30 stocks tend to drag along with no clear direction.
Bread and Butter

Strategy #3 – Wait for the Gap Fill

This is another strategy that works for other traders but I have yet to master.

This is where you wait for a stock to pull back to its prior days close and fill the gap. You then wait to see a
sign of strength and enter the position on that move.

You then place a stop below the low of the candlestick.

The hard part of this strategy is setting your price target. I have noticed that these pullbacks exceed the high
or low of the morning by much.

Most professional traders buy the pullback and then sell the retest of the high of the morning.

Gap Fill Strategy

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Simple Strategy for Trading

Gap Pullbacks
Jun 13, 2011

Written by:
Al Hill

Our next strategy, the gap pullback buy, is one of my favorite setups. It allows us to let the morning
action play out and enter into a trade with a strong setup and relatively low amounts of risk.

Trading Characteristics of a Gap

Pullback Buy
The gap pullback buy is predicated on the concept that the majority of the traders who chase a gap
will do it on the open with market orders. The rest of the novice traders who don’t chase the open will
eventually get greedy and buy in over the next few 5 minute bars, albeit, with lower volume. Once this
early morning interest fizzles out, the stock will begin to fall. Obviously, not all gaps will be retraced
but if this day trading opportunity presents itself, we will be prepared with a plan.

Volume is key to this strategy and it is important to note that we want to see the stock open on huge
volume followed by a further advance of 1 to 3 bars on lighter volume. It is in this light volume
advance where we will see the lack of leadership and the precursor to a move lower. At this point we
do nothing, except for observe the volume behavior. We are not attempting to pick a top and go short.

Once the stock makes its eventual short term top, we want to see it move lower on decreasing
volume and partially close the gap before putting in a strong reversal bar, a hammer candlestick
would be perfect here. Traders should look for a strong pickup in volume on the reversal bar before
taking a long position on the next bar. To increase the odds of a successful trade, the signal bar
should close above the open of the session and stay above the close of the previous session. This
will provide more indication that the stocks gap is for real. A buy stop order would be helpful here as
traders can buy above the high of the reversal bar if price continues to move higher.

The presence of heavy volume and a strong reversal suggest that the big money is supporting this
stock. This is exactly what we want to see as traders who are looking to follow the money.

Money Management
The rules for taking this trade and stopping it out are fairly simple. A long position should only be
taken when price penetrates above the high of the reversal bar. A stop loss order should immediately
be placed below the low of that bar and if the range of the bar is too large, move your position size
down so that you are able to trade the setup the way it was intended to be traded. One of my personal
rules is to set my stop to breakeven the second I am up 1% on the position. It is absolutely
unacceptable as a day trader to be up on a trade by a significant amount and end up taking a loss on
it.

As far as upside is concerned, the first bigger target is the high of the day where I will sell at least
half, if not all of the position. However, always stay abreast of the market condition and the other
support and resistance areas on the chart. If there are significant levels of resistance on the path to
the HOD, I will not think twice about selling some of my position. Remember, this game is a marathon,
not a sprint. Your goal should be to take small, consistent profits from the market rather than lottery
money. This is not a dreamer’s game. The worst mistake a trader can make is to get attached to
targets without tying in the context of the overall market; be nimble and be ready to change at any
time.

The gap pullback sell is the opposite of this pattern. It occurs after a gap down on the open followed
by a retracement into that gap and a subsequent failure. You can basically turn our chart from above,
upside down, to get an idea of how this day trading setup would look.

Trading Pullbacks Intraday

Since you are now familiar with the basic concepts, let’s dive into real-life examples of stock pullback
trading strategy.

Gap Pullback Strategy

This is the 2-minute chart of Apple from Feb 10, 2016.

Apple opens with a bullish gap, with high volume that quickly reverses to the downside and retraces
approximately 2/3 of the gap. After this three bar selloff, Apple prints an inverted hammer reversal
signal and on the close of this candle we go long.

We use the low of the prior candle as our stop. Our profit target is located near the morning’s high –
the green horizontal line on the image.

As you can see, Apple found its footing and reversed to the high of the day. The key points to call out
in this trade is that we had clear entry, stops and profit targets for the trade.

Closing Portions of a Trade

After the target is reached, we close half of the trade. Apple begins to consolidate after the initial
target is reached. We hold the trade during the consolidation and we wait for the continuation of the
breakout move.

Suddenly, volume begins to increase rapidly and APPL closes above the previous morning high. We
immediately adjust our stop loss order above the previous high as shown on the image above. This
way we lock in guaranteed profit above our first exit price.

The next candle on the chart is bearish and hits our stop. With the other half of the trade we managed
to catch a further increase of $0.16 (16 cents) per share.

We made a profit of .65% on the first half and .74% on the second half of the position.

Let’s cover another trading example.

Gap Pullback Strategy – 2

This is a 2-minute chart of JP Morgan Chase & Co. from Oct 15, 2015. The image illustrates a gap
pullback very similar to the previous example of Apple.

As you continue to gain trading experience, you will notice that these patterns often repeat
themselves time and time again.

First, JPM stock starts the trading day with a bullish gap on high volume. The price tops out at $60.61
and starts selling off on the very next candle. The decrease continues for three periods in a row. Then
the price sets a bottom at $60.10 per share, retracing approximately 80% of the gap.

The next candle after the decrease is an inverted hammer reversal candlestick, which confirms that
JPM is likely to reverse the downtrend and we enter a long position on the close of the candlestick.

The stop loss should be located below the low of the day, which is the wick of the previous
candlestick.

After we enter the trade, the price begins increasing and our minimum target of the days’ high is
reached. At this point, you as a trader have a choice to make. You can either: (1) close the entire
trade and book your profits or (2) close a portion of the trade and hold for a higher price to sell.

Let’s assume you only sold half of the position.

Gap Pullback Strategy – VWMA

This is the same chart image, which includes the further price action of the JP Morgan and Chase
stock until noon. Instead of using a tight stop in our previous Apple example after reaching our first
target, we enlist the help of the 20-period volume weighted moving average (VWMA).

JPM begins a rally that takes the stock to a new high of $61.05. After JPM begins to rollover, we exit
our long position once the stock closes beneath the 20-period VWMA.

On the first half of the trade we were able to capture a .75% profit and 1.26% on the second half.

Adjusting the Stop on Long Gap

Pullback Trades
Another way to determine an exit signal on your long pullback trade is to manually adjust your stop
loss. Every time the price has a corrective move, you should place your stop below the most recent
bottom. Your stop will remain in place until a higher bottom prints on the chart, at which point you
should adjust your stop accordingly.

Let’s again review the JP Morgan Chase & Co. trade using this stop approach.
Gap Pullback Strategy – Manual Stops

We have removed the 20-period volume weighted moving average and have listed the 6 times you
would have updated your stops based on the price action of JPM.

Notice that we do not move our first stop before the price reaches the first target and sets a higher
low. Once a new high is reached, we then adjust our stops accordingly based on the swing lows
printed on the chart.

In this case, we close approximately at the same price as the VWMA indicator at stop #7. However, in
most cases, manually adjusting stops will get you out a bit earlier.

This has positive and negative implications.

The image below will show you the difference between the two.

Gap Pullback Strategy – Manual Stops versus VWMA

Above you see the 3-minute chart of Citigroup from Oct 15, 2015. On the chart we have the 20-period
VWMA and stop loss levels based on each swing low.
The trading day starts with a bullish gap with high volume. During the next few periods, the volumes
are still big, but they are decreasing. Two periods after the market opens, Citigroup decreases sharply,
filling approximately 70% of the morning gap.

Citigroup then creates a bottom with two hammer reversal candles and we get long. The minimum
target of the trade should be located at the high of the gap as shown on the image above. Your initial
stop loss order should be located below the low of the day.

Once the first target is reached, let’s now follow the manual stop loss orders and the 20-period VWMA
to identify the exit signals generated by each approach.

After the price reaches the minimum target, we see a decrease which breaks the 20-period VWMA.
However, we disregard this signal because the price has not switched above the minimum target and
we rely on our initial stop loss order. Citigroup price increases afterwards and breaks the minimum
target.

When this happens, we adjust our stop loss below the previous bottom at position (2) and activate
our 20-period VWMA stop as well.

As Citigroup climbs the proverbial wall of worry, we update our manual stops below each swing low
and below the 20-period VWMA.

After we place the stop loss order at #4, the price increases initially; however, the correction breaches
the 20-period VWMA near manual stop #5.

If we rely on the volume weighted moving average for closing our gap pullback buy trades, we would
exit the trade as this point.

On the flip side, if you were using swing lows as your stops, stop #4 was not breached and you would
have stayed in the trade. To take it a step further, based on the manual stop loss strategy, we would
have closed the trade out at 52.93 when the price hits the adjusted stop loss #8.

Summary of the VWMA versus Manual

Stops Approach
Based on the 20-period VWMA, the profit from the second part of the trade equaled 1.92%.

Conversely, on the manual stop loss order strategy, the profit from the second part of the trade was
2.96%.

Please do not interpret this to mean a manual stop always outperforms an indicator. You have to
know when to use the right approach, or keep things simple and stick with one.
A good rule of thumb is that if the price moves dramatically higher, using a swing low may require you
to give back a lot of your profits if the stock rolls over. On the other hand, if a stock is slowly stair
stepping higher, a moving average will likely stop you out based on a low volume test of support
levels.

Conclusion
The gap pullback occurs when novice traders are misled by a gap in the morning.

The gap pullback is a great morning strategy as it reduces your risk as you are not buying at the
highs of the day.

At the end of the pullback, we need a reversal candle in order to enter a trade.

Properly interpreting volume is a crucial ingredient when trading gap pullbacks.

Your initial stop loss should be located below the lowest wick of the pullback’s bottom (low of
the day).

When the minimum target is reached, you can close the whole trade or part of it.

You can use either manual stops or a moving average to manage the winning position.

Tags: Awesome Day Trading Strategies

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Top 3 Morning Gap Setups

Jun 23, 2011

Written by:
Al Hill

It will be important to understand a few key elements before we dive into the specific strategies; such
as volume, volatility, and risk tolerance. You will need to understand these building blocks in order to
have a more complete understanding of morning gap trading. Remember, you have a very short time
window to execute your trades and you need to be able to quickly process all the clues that are given
to you.

Volume
Volume is probably the most important tool that you can have available to you. We have done an
extensive write-up on how to read the time and sales window (aka. Tape reading) which will provide
you with the trading activity of each stock. As a trader, you need to understand the significance of
high or low volume, especially when it occurs at important support and resistance levels.

When we see high volume attacking a support or resistance area and pushing through it, it is a sign
that the sellers or buyers are in control and that enough energy has been exerted to actually signal a
continuation in trend for a larger period of time. Generally speaking, you want to see a volume
picking up as it approaches a resistance level and takes it out with heavier volume in comparison to
the previous volume figures recorded in the past at that same price level.

Light volume; however, is not necessarily a bad thing. Light volume can allow the stock to ramp
much higher and much faster than if there was heavy interest in the stock. This can be a good thing
when the stock is in a confirmed uptrend and you are riding the trend higher. But always be cautious
of a high volume spike after a sustained uptrend, this could put a wrap on the move, at least for the
short term.

Volatility
Be aware that it is very important to understand the principle of action and reaction. For example, if a
stock moves substantially higher over a 3 day period without any major retracements, a trader should
prepare for a reaction that would be commensurate to the previous move higher.

When we see stocks moving extremely fast, up or down, there is a risk for high levels of volatility on
the opposite side and this can signal large moves up and down, where emotions take over and
technical analysis gets thrown out the window. Keep this in mind when you select the stocks that you
trade. Higher volatility leads to larger swings which lead to irrational market movement.

For this reason, I find it more beneficial to trade larger-cap stocks which attract the big money,
thereby reducing the massive levels of volatility that can be seen in small-cap stocks.

Risk Tolerance
This sounds simple, but trust me, when you are in the trade it isn’t so easy. Define your trading risk
profile before you start trading. Define the amount of money you are willing to risk and understand if
a potential trading candidate fits in line with your risk profile. Far too many traders think that they can
approach a Dow component in the same way that they approach a Chinese internet stock.
Depending on your trading rules, a high volatility stock may take you out of an otherwise good trade
due to the violent whipsaws that occur in these stocks. If you cannot emotionally handle large
swings, don’t trade the stock. There is always another trade. If you still feel the need to trade these
stocks, dramatically decrease your position size. Remember, consistency is the key in this game and
you do not want to disrupt that with large losses in the account, no matter how much of an itch you
get.

Opening Gap Trading

Strategies
#1 – Gap and Go Strategy
The first morning gap trading pattern we will discuss is the gap and go strategy.

The gap and go strategy starts with a bullish gap on the opening bell, followed by a further price
increase. It is crucial that the trading volumes are high at the time of the gap. After the gap, volumes
will decrease, but still will be relatively high.

Essentially after the gap, the stock never looks back. This prevents any opportunities for short
traders to exit their positions.

Gap and Go Strategy

Above is a 2-minute chart of Electronic Arts from Sep 2, 2016 displaying a gap and go strategy.

See that the trading day starts with a bullish gap with high trading volumes, followed by further
bullish price action.

The price literally runs straight up for 30 minutes without ever looking back.
While this rally ended around midday, there are times when a stock will run the entire day.

Your goal with trading this strategy is to eat as much of the gains as humanly possible.

Let’s review another gap and go setup.

Gap and Go Trading Strategy

This time we are looking at the 5-minute chart of Facebook Incorporated from Sep 8, 2016.

The trading day starts with a bullish gap.

The first three 5-minute candles are bullish. This is when trading volumes are highest. This is why we
assume that we might have a gap-and-go pattern on the chart and we buy Facebook.

Next we of course place a stop loss, which is the one thing I hope you get out of the blog posts on the
site – always use a stop loss.

We place the stop loss at the bottom of the last candle from the previous trading session.

Notice that the FB enters a strong bullish trend after the morning gap.

A simple exit strategy is to draw a basic trend line on the chart and to hold the stock until this level is
breached.

On the chart, we have indicated with the red circle the point at which the stock breaks the uptrend.

However, since the trend is really strong, a single candle below the trend cannot be taken as a valid
signal to exit the trade.

This of course is very subjective, so you need to have a ton of self-discipline before implementing
such a strategy.
For this reason, we wait for the FB price to break the swing low after the most recent high. Notice that
the price ultimately broke this swing low, at which point we closed the trade.

#2 – Gap Pullback Buy

Strategy
The gap pullback strategy is likely the most widely used gap trading strategy in the market.

This gap pullback strategy is similar to the gap and go strategy in that the gap is bullish and you will
want to go long the trade.

Once you get beyond these basic elements, the two gap setups are quite different.

In order to get a valid gap pullback buy signal, you first need to see a bullish morning gap with high
trading volumes. Then you need a price pullback with quiet volume.

A valid gap pullback buy pattern is likely to reverse the pullback move somewhere below the mid-
point of the gap. The expectation is that the stock will then reverse back to the high of the day and
enter a strong bullish trend.

Gap Pullback Trading Strategy

Above is the 15-minute chart of Apple from June 28, 2016.

See that the trading day starts with a bullish gap on the opening bell. The volumes are high as the
stock trends higher.
However, the price begins to falter and ultimately slips through the mid-point of the gap and fills the
gap completely. Meanwhile, volumes are tapering off as Apple trends lower.

Then we see a reversal and increasing trading volumes.

Is your head spinning yet from the volatility in the market? One minute it is up, the next you have no
idea which way you are going.

This is the nature of trading and the better you get at accepting the uncertainty, the better off you will
be in the long run.

The reversal of the pullback often happens after a reversal candle pattern on the chart. If you see a
bullish candle during the pullback, you could potentially be seeing the beginning of a new bullish
move.

Once you see this reversal point, you will want to go long the stock.

A stop-loss order should be placed below the gap low. This way your trade will be protected against a
false signal.

There are a couple of targets with the gap pullback setup.

The first one is located at the top of the gap. The second larger target can be set using Fibonacci
extensions or just monitoring the price action of the stock.

Let’s review a gap pullback buy strategy to further clarify these points.

Apple – Gap Trading Strategy

This is the same Apple chart we discussed above. This time, we have added specific trade signals on
the chart.

The black horizontal line on the image indicates the resistance area formed right after the gap. See
that there are four candles after the gap creation, which are crawling under this level.
The price finally backed off this resistance level and filled the gap.

As Apple is filling the gap, the volumes drop off substantially.

Then a harami reversal candle pattern appears on the chart. This indicates that the price action might
reverse.

The next candle after the harami pattern goes above the candle figure and confirms the potential
increase. We use this candle to buy Apple.

The price then begins to rally higher.

We place a stop-loss order right below the lowest point of the gap. This is shown with the red
horizontal image on the chart.

Eleven periods later we see that AAPL reaches the first target of the pattern, which is the high of the
morning gap. The rally then rallies through the gap high.

The trade then could be held until the end of the trading session. You can exit the market a few
minutes prior to the closing as shown on the chart.

#3 – Morning Reversal –
Gap Fill Strategy
The next gap approach is when you place a trade counter to the primary trend in hopes of filling the
gap.

Therefore, if the stock opens with a bullish gap, the price could fill the gap on the chart with a bearish
move.

The gap usually appears with high trading volumes.

Then the volumes decrease simultaneously with the pullback.

Gap Fill Strategy

This is the 5-minute chart of Citigroup from April 28, 2016.

See that the gap opens with high trading volumes, then the volume drops off a cliff as the price action
begins to trade sideways.

This illustrates the inability of the bears to push the stock lower.

Reversal Gap Trading Example

After the bearish gap we have another tiny bearish candle.

The candle appears to be small due to a drop in volume. The next candle is the well-known hammer
reversal candle pattern. This implies that the price action could reverse and fill the gap.

The volume on this candle is even lower. The next candle is bullish and breaks the top of the hammer.

This confirms the reversal potential of the pattern and we buy Citigroup. Our assumption is that the
price action could start a move opposite to the gap.
We place a stop-loss order right below the low of the hammer.

The price continues to increase and almost reaches the top of the gap. However, a slight hesitation
holds the price from reaching our target. After two consolidations, the price increases and reaches
the top of the gap. This completes our target and we exit our morning reversal gap fill trade.

Trading the gap for a living is a common approach to tackle the markets in the morning hours.

What I have noticed after logging thousands of trades is that buying the pullback is the safest risk-
reward ratio.

The downside is you may have to sit in the trade for an extended period of time to see if the stock can
actually exceed its previous high.

Conclusion
1. There are three basic tools that could help you assess morning gaps:
1. Volume – High volumes are always a confirmation of the price’s direction. Low volumes
indicate that the price action is not very persuasive.
2. Volatility – Remember this: “For every action, there is an equal and opposite reaction” –
Newton
3. Risk – You should always be aware of the loss you are willing to take. Morning gaps
involve a high dose of trading volume and volatility. This means that many unexpected
things could happen on the chart.
2. Morning gap trading strategies:
1. Gap and Go Strategy: The price creates a bullish gap and continues to trend upwards
without ever looking back.
2. Gap Pullback Buy Strategy: The price does a bullish gap but the price pulls back
afterwards. The mid-point of the gap is crossed and the pullback nearly reaches the low of
the gap. The assumption is that the price will reverse and break the gap high.
3. Morning Reversal Gap Fill: The price gaps up or down on the market opening. The gap
then gets filled in the opposite direction. You can use this as an opportunity to go counter
to the primary trend.

Tags: Day Trading Basics, Awesome Day Trading Strategies

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Opening Bell – 2 Simple

Trading Strategies
Jul 16, 2011

Written by:
Al Hill

In this article, I will cover two basic trading strategies you can utilize during the market open. But
first, let’s discuss what drives the madness shortly after the opening bell.

Like many other newbie traders, I thought, “the money is in the morning!!”. Well, yes and no. If you
have a few thousand-day trades under your belt, then yes you can make great money in the morning.
However, if you are just starting out in the day trading game, you will want to paper trade the morning
for an “extended” period of time.

Earnings
Overnight and in the morning there are a number of factors which cause the volatility during the
morning session. Most Nasdaq stocks release their earnings after the closing bell, and many
professional traders will actively trade these issues during the post-market session. But, the majority
of the public does not feel comfortable or even know how to trade stocks outside of the regular
session. So, you will see a flood of public orders reacting to the news in the morning. While the
Nasdaq stocks report after the bell, stocks listed on the New York Stock Exchange (NYSE) and
American Stock Exchange (AMEX) report before the opening bell. These earnings reports are mostly
released between 8 am and 9:15 am. So, again you have traders falling over themselves to react to
the earnings report; however, unlike the Nasdaq, which you can trade actively during the pre and post
markets, with the NYSE and AMEX, unless you are Goldman Sachs, you will have to wait your turn
after the bell rings at 9:30 am.

News
Thank the folks over at CNBC, Wall Street Journal, and stock analysts for this one. Now, I’m not one
of those traders bashing the news syndicates and investment firms, they are simply doing their job.
It’s how traders respond to this information which generates the moves. This is why I always stay
informed of what’s in the news, but I do not trade based on the news. Step back and think about it for
a second. Does Cramer have any idea of your investment objectives? Has Cramer done a detailed risk
analysis of your portfolio? Well, if you are unsure of the answers to these questions, it is NO!!! It really
gets under my skin when people say Cramer said the stock would go up, I bought it, and it tanked.
Well, this is the stock market, unexpected things happen, the bigger question is, why did you take
Cramer’s advice on blind faith without doing your own research? How can you buy a stock without
knowing the price swings or how the stock trades? Cramer covers anywhere from 25-50 stocks every
day. Even if Cramer is a great trader, at least 30% of these calls will be wrong. While these are great
odds, you nor Cramer, have any idea which “pick” is more likely to work out. But, the public loves to
react to these “public tips” from television and stock analysts, which is a major contributor to the
sharp moves as everyone is reacting to the news.

Economic Reports
Every day there is some news release related to the economy. The unemployment rate, housing
market, CPI numbers, etc. These numbers affect the bond market and treasury yields, which in turn
affects equities. If you are day trading, it is a must that you know the economic schedule, so you are
not blindsided by a 10 am existing home sales report. Visit yahoo finance to see the list of upcoming
economic events.

Federal Open Market Committee

(FOMC) Meeting
The FOMC meeting is technically part of the economic calendar, but it is such a huge event that it
needs to have its own section in this article. The FOMC is responsible for the following monetary
policies: open market operations, the discount rate, and reserve requirements. The FOMC holds eight
scheduled meetings per year. The FOMC meeting minutes are released three weeks after each
scheduled meeting at 2:15 pm. The days leading up to and the morning of the FOMC announcement,
you basically have flat markets. So, you will want to cut back on the number of trades you put on prior
to the 2:15 pm release, as you will get caught in the chop.

Why Novice Traders should stay away

from the Opening Bell
The opening bell will provide great trading opportunities, but it also carries a great deal of risk. Let me
provide you with a real-life example. Let’s say you noticed the gap on MXIM on 8/17 in the morning.
The stock was up over three percent and it appeared that it cleared a significant downtrend. Then the
stock backed off of this resistance line, but not by much. So, it looks and feels as though MXIM is
going to make a break for it. On the next 15-minute candle, MXIM had an inside bar. But this doesn’t
concern you as no highs or lows were penetrated. MXIM then produces three more down candles on
the 15-minute chart, prior to rolling overfilling the gap and dropping a point. This quick reaction to the
morning gap would have represented a five percent loss in a matter of three hours. Often times new
traders are unable to adjust to quick changes in trends and do not have the experience to know when
to get on and off the horse. Remember, the opening bell is not going anywhere. The volatility will
always be present, it is part of the game. So, take your time getting used to the setups, it is well worth
the wait.

Market Open Trading Strategies

Now that we have covered some of the general topics related to the opening bell, let’s dig further into
actual opening bell trading strategies for navigating the chaos.
Let me first reiterate that the volatility is where you can make money in the market, but it’s also a way
to lose money. Therefore, if you feel you need to crawl before you walk, take your time.

Strategy #1 – Fading the Opening Gap

In prior articles, I have covered more volatile gap strategies, but in this post, I will try to address our
more risk-averse friends with a trading strategy they can use in the morning.

The basis of this strategy is that if there is a gap between 0.5% and 1.5%, there is a solid chance for
the price to completely retrace the gap. Reason being, there wasn’t a lot of force in the move,
therefore traders will likely fade the gap.

When the markets open, you first need to spot these lackluster gaps, which believe it or not are quite
prevalent in the market. Like you, I am focused on the big winners and losers, while this low hanging
fruit is all around us.

For long trades, buy the stock after the gap down. Short trades should be entered after the minor gap
up.

Another thing you will want to look for is a light volume on the gaps, as these again reiterate the
weakness of the move.

A stop loss should be used when trading this strategy. I will suggest you use a stop loss equal to half
the amount of the gap. So, if the gap is 1.3% of the stock price, you should place a stop at 0.65%. This
way the stop will give us approximately 1:2 risk-to-return ratio.

The target for each opening gap trade is the close of the previous day.

Let’s now walk through a real-life chart example:

Fade the Morning Gap

This is the 2-minute chart of Twitter from the market opening on Oct 16, 2015. In this example, we
opened a short trade based on the counter gap trading strategy.

Twitter opened with a bullish gap of 1.17%, which is within our parameter of 0.5% – 1.5%.

We open a short trade on TWTR at $30.08. We then place our stop loss order at a distance equal to
half the amount of the gap, which is 0.59% above our entry. This stop loss again ensures we have a
risk to reward ratio of approximately 1:2.

As you see, the price starts declining with the first candle after the gap, before another failed attempt
at a rally, which does not trip our stop.

12 minutes later, the price decreases to our profit target and we exit the trade. We were able to walk
away from this trade with a 1.11% profit.

You could be thinking to yourself, well what is so fancy about this approach. You are absolutely
correct with that line of thought. The key to this strategy is our attention to maintaining a healthy risk
to reward ratio on every position and also not looking for much in terms of profits.

If you are able to swing for singles and make sure you keep your winners bigger than your losers,
things tend to work out for the best.

Strategy #2 – Using Price Action to Ride the Gap

Knowing which side of a trade to take with a gap is the key. You will need to closely monitor the price
action as it develops to anticipate which way the market will inevitably break.

Trading in the direction of the primary trend logically should be easier, but trust me when I say there is
no free lunch in the market.

The secret or edge to identifying which way the trend will break comes down to sitting tight for the
first 30 minutes and doing nothing. That’s right, let the action play out right before your eyes without
taking any trades.

Let’s now dig into a real-world example:

Price Action Trading Strategies

This is the 5-minute chart of Ford Motor Co, from Jan 13 – 14, 2016. We have a short trade, which
was signaled during the Opening Bell, 30 minutes after the price gap.

Ford starts the new trading day with a bearish gap of $0.27 (27 cents). We set the high and the low of
the gap as shown on the image above. 30 minutes later, we see that the price is still below the low of
the gap. We short Ford and immediately place our stop loss right above the gap.

After we enter the market, the price starts a sideways move. For this reason, we place the purple
resistance area above the tops of the price.

If Ford breaks this level, we need to close our position; however, the price begins another decrease.
After this decrease, another resistance area develops (blue line). Notice that the price then falls off a
cliff.

We exit the market when the price closes a candle above the blue resistance. We generated a profit
equal to $0.32 (32 cents), which is 2.55% of the share value. With our stop loss, we also risked $0.32
(32 cents). This means that we created a short trade with 1:1 risk-to-return ratio. Notice that in most
of the cases if you are right with your position, you will generate more than a 1:1 risk-to-return.

Sometimes this will be 1:2, 1:3, or even 1:4. Also, if you want to lessen the volatility of your trades
after the price develops during the first 30 minutes, you can extend the waiting time. Some traders
wait up to one hour before they enter based on signals from the opening gap.

Combining the Two Opening Bell Trading Strategies

The fade the gap and price action strategy can be combined to really take advantage of the opening
gap plays.

Have a look at the image below:

Combining Both Opening Bell Trading Strategies

This is the 5-minute chart of Yahoo from Oct 2, 2015.

First, Yahoo opens the day with a 1.3% bearish gap. The gap falls in our 0.5% – 1.5% zone, so we
immediately go long, as stated in our fade the gap strategy. We set a stop loss of 0.65% below the
entry price.

The gap is eventually closed and our profit target is hit. As you can see, the price then overcomes the
previous day’s high after the first thirty minutes of trading, which triggers our second strategy. Good
for us, all we have to do is hold the position.

The red lines represent support areas, which could be used to close our trade. Fortunately, none of
these support zones are breached and we managed to stay in the market until the end of the trading
day. We exit the trade one period before the market closing.

In this trade, we risked 0.65% of the size of our trade. However, with risking 0.65%, we managed to
catch a price increase equal to 7.24%, which is more than impressive. This way we created 1:11 risk-
to-return ratio.

This trade reveals the full power of the opening bell trading strategies.

Conclusion
The Opening Bell is a very volatile trading period.
Some of the events which affect the price action in the opening bell are:
Earnings Reports
Economic Reports
Federal Opening Market Committee (FOMC) Meetings
Only experienced traders should trade during the opening bell.
 Two trading strategies you should explore after the market opens are:
Fading the opening gap
Letting price develop after the gap and then take the trade
These two strategies can be combined at times to cover the entire trading day.

Tags: Day Trading Basics, Awesome Day Trading Strategies

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