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.