There are hundreds of different ways to trade GAPs at the Open and it really comes down to your trading style along with what works and doesn't work.
Also, I see a lot of statistics thrown around at other discussion forums about GAP fills and you really need to be careful about these statistics because they may not apply to your particular trading instrument nor apply to the current market environment.
Simply, if your the statistical type...do your own stats involving your trading instrument.
With that said, my main strategy for trading GAPs at the Open is that I don't use a strategy specific for GAP trading.
Thus, I stick to my normal trading plan for my entry signals (regardless if there's a gap or not).
However, if there is a GAP for a particular reason, I will manage my exit (profit target) differently than I would for a normal trade via WRBs.
First of all, you must
know what caused the GAP to give the trade context.
If I can't find the cause or don't understand it...I exit my trades normally without any consideration to the GAP.
For example, here's a trade not taken by me but taken by someone else via almost the same way I trade GAPs.
Take a look at the 2min
regular chart for Nasdaq 100 Emini NQ futures on March 28th Wednesday at the Open.
NQ open as a big down gap around Tuesday around 1799.50 in comparison to its closing price on March 27th Tuesday at 1810.25
That's a 10.75 points as a down gap.
Lets find the cause of that 10.75 gap.
Go back to March 27th Tuesday around 4:50pm est there's news (market concerns) about the geopolitical about Iran the cause the NYMEX Light Crude Oil CL futures to spike up $5 (investors on the edge about Iran)...
This sent the Emini Futures sharply downward in the globex overnight trading session.
Here's the first key price movement...a Dark WRB formed via NQ's 2min
all session globex chart at 4:52pm est.
This Dark WRB has a body range of 1809.25 - 1808.50
Next, there's a bigger Dark WRB spike downward on more volatility at 4:54pm est.
This Dark WRB has a body range of 1807.75 - 1797.50
Regardless to the size of the consecutive Dark WRB's...the first Dark WRB gets designated as the
key s/r zone because its the first Dark WRB to react to the market news.
Thus, the key s/r zone is 1809.25 - 1808.50
I'm also implying here that if your going to trade GAPs directly or indirectly, if you find the cause of the gap, that means you need to monitor both the regular session chart (9:30am - 4:15pm est) and the all session globex chart (includes regular hours and the overnight trading session).
Fast foward to March 28th Wednesday, we now know the context of the GAP.
We also need to keep an eye on NYMEX Light Crude Oil CL futures or any other key Oil trading instrument or Oil Index because the context of the GAP is directly related to Oil.
Also, a trader that ignores
intermarket analysis when the price movement in your trading instrument is caused by another key trading instrument...
That's a trader trading with one arm behind his/her back (we can debate about this in another thread).
Getting back to NQ Emini futures.
NQ gapped down at the Open and while there's a lot of downside pressure on Oil at the same time.
That downside pressure in Oil relaxes a little when Oil has a shift in supply/demand that can be visibly seen by White Hammer lines in different Oil markets 2min - 5min charts around 09:40am est.
This allows NQ and other Emini futures to counter-thrust upward and attempt its first GAP fill.
Oil then retraces back downwards (retracing the White Hammer line) to produce another shift in supply demand.
This halts the counter-thrust rally in its tracks for NQ and other Emini futures.
Next, there's the 10:30am est EIA Petroleum Status Report and with concerns about Iran.
In addition, there's the 1030am est FED Chairman Bernanke speech that caught many retail traders off guard due to the fact some sources had the speech time at 0930am est.
You combine Iran concerns, Oil and Bernanke...no technial analysis is needed to know that there will be an extreme volatile price movement.
It dropped big time.
Then around 10:42am - 1046am est...Oil halts its parabolic decline and many different Oil trading instruments put in valid Bullish Hammer patterns.
Thus, any trader getting Long signals in the Emini futures for whatever reasons between 10:40am - 10:46am est...
This will be the first real attempt at a change in supply/demand that could decide to close the GAP.
I had several different bullish signals in this time duration (10:40am - 10:46am est) and I'll mention one I'm sure many can relate to.
Take a look at your 5min chart of the NDX.X Index.
A Bullish White Hammer pattern closed at 1040am est and at that same time...
NQ Emini futures was at 1794.25 via the 5min chart.
Tough trade to psychologically take especially after watching the big price drop in NQ.
However, getting back to the 2min chart key s/r zone...the 5min chart valid bullish pattern signal serves as a warning to look for the real entry via the 2min chart.
Once again, we go back to intermarket analysis considering we know what's really leading NQ on this particular trading day at this particular time (will be different on another trading day).
The bullish reason to get into the Eminis occurred via the same bullish reasons in Oil. However, I'm not talking about price correlations, I'm talking about knowing what is causing NQ to do what it is doing...the real story and not the technical story...
Understanding the price action.
NQ price at 1046am est is 1791.50 and the key s/r zone (profit target) is above at 1809.25 - 1808.50 (a minimum reward of +17 NQ points).
Further, without "intermarket analysis", this long signal would have been psychologically tough to manage due to the fact it occurred after a parabolic price drop...
Most traders would have been on the sidelines watching or do a later entry or assume there will be no attempt at a GAP fill because they would have been concentrating their efforts on the possible fill in the first 30mins of trading.
Also, in one of my first post here at Traderslaboratory I talked about there's are times of the trading here where you will know with high probability the direction of the price movement via
repetitive tendencies about the markets.
http://www.traderslaboratory.com/for....html#post8215
This is one of those times of the year and it relates to breaking news events the day before a EIA Petroleum Report involving Oil (it happens more often than you think...enough to make some consistent big profits).
Yet, this didn't turn into a trend day after 1045am est but that wasn't the goal nor should we be concerned about such because our priority is the first goal of the trade and if a trend day develops...that's ok too (it didn't).
The goal was that key s/r zone 1809.25 - 1808.50
NQ moves upwards and then plays a cat & mouse game between 11:10am - 12:02pm est on low volatility.
More importantly...
contracting volatility and NQ at 12:02pm est is at 1795.25 or about +13.25 points away from the profit target zone.
Well, we all know what happens when volatility contracts...it will expands.
NQ volatility picked up until it reached a high of 1809.00 at 12:26pm est.
At this point its time to exit the Long position because the price is now in that key s/r zone caused by the breaking news event back on March 27th Tuesday...
The same news event that caused the price action to be a Down GAP at the Open for March 28th Wednedsday.
Ok...so the profit target is reached...what about the GAP fill?
I mean, should you have stayed in the trade to attempt a GAP fill.
The answer is NO because the odds began to drop there's further price movement when a breaking news key s/r zone is reached.
Yet, if you are the greedy type...you could have exited most of your position if your trading multiple contracts (NQ) or shares (QQQQ) and left a few on the table with a tight trailing stop to see if you can catch a GAP fill.
Simply, your remainders should be managed for a completely different reason that's associated with the GAP fill.
Anyways, NQ didn't fill the GAP but it still reached its profit target of filling in the s/r zone of what caused the GAP.
I also have a rule of thumb in that once I've had a trade that reached its profit target via filling in the s/r zone of the cause of the GAP...
I no longer consider the cause of the GAP as a profit target because that goal has been fulfilled.
Thus, I go back to my normal WRB profit targets.
Therefore, some traders look for trades to fill in the GAP itself.
I prefer to find the cause of the GAP and then look for trades to fill in the key s/r zone caused by the key market event instead of the GAP itself.
Once again, I did not take this trade on March 28th Weds 2007 but I do know others that did from the Long signal to the Key S/R Zone WRB profit target.
P.S. Don't confuse my above long winded message into thinking this type of Trading the GAPs is complicated because it's not difficult nor does it require a degree in rocket science.
Just remember that the market is much bigger than NQ or any other Emini Futures.
Mark
(a.k.a.
NihabaAshi Japanese Candlestick term