Thursday, May 22, 2014

Day Trading Gaps;

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.

Day trading with GAPs
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.

Day trading with GAPs
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.

Day trading with GAPs
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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