[Soultrader]

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.

[notouch]

What do you mean exactly by the majority of sectors being red or green? I think I know what you mean but maybe you could clarify that. Also what's the value of using SSFs instead of ES or YM (or whatever ) volume. SSF volume is very low so I would have thought ES volume would be a better because it's the grandaddy of volume.

[Soultrader]

Originally Posted by notouch »

What do you mean exactly by the majority of sectors being red or green? I think I know what you mean but maybe you could clarify that. Also what's the value of using SSFs instead of ES or YM (or whatever ) volume. SSF volume is very low so I would have thought ES volume would be a better because it's the grandaddy of volume.

Im just posting some of the criteria that I personally use. Each trader should have their own criteria. By premarket SSF, look for any sign of unusual volume. Do you keep track of the average volume of several SSF's? Would you be able to recognize any sign of increase in average volume? If not, you might want to pay attention to it. I also do not understand why you want to look at ES premarket volume to play a gap trade on the YM. Maybe you have other methods that I do not use.

[notouch]

No need to get defensive ST, I'm just adding a bit of friendly discussion.

Do you mean the SSFs of the DOW 30 stocks? It seems to me that volume is too light on these contracts to really give us very useful information. I would have though YM premarket volume would be more reliable. ES is good because the DOW 30 is a subset of the S&P 500 and YM almost always moves in tandem with ES. ES volume is much higher so probably more reliable (no one trader could cause an abnormal volume spike on ES, unlike YM or SSFs).

[weiwei]

Here is my 2 cents on gap.

1. up day, up day and gap up, or down day, down day then gap down. fade it

2. If there is afternoon strength yesterday, then gap up, then I do not fade it and start to look for sign of a trending day.

On 1. this is from Linda Rashisck, and the way that I use it is to measure the current swing with last swing. If the pass 2 to 3 days put in a nice swing that is close to last swing, then it gap up big or gap up and run up. and when it is hitting on a important SR level, when that the risk reward is good, I will start to look for sign of weakness. Usually on ER2 more then 4 points and on YM more then 40 points is what I look for. It dose not happen a lot, but when it happen, it is usually very reliable.

on 2, after those Index markets have been beat down for 2+ days or in range mode for 2 day+, then if a rally came on the afternoon with nice volume and steady up. (like today).

I perfer a V shape and close at swing high, in other word, showing strength into the close. Then if there is a gap up, I then start to look for sign for a trending day. Or at least not to fade the gap.

weiwei

[Soultrader]

Originally Posted by notouch »

Do you mean the SSFs of the DOW 30 stocks? It seems to me that volume is too light on these contracts to really give us very useful information.

I personally pay close atention to the following SSF's: KLAC, AMAT, NVLS, and MXIM. Some SSF's are traded more actively premarket than the others. I keep an eye of the SSF's that are never active premarket but shows significant increases in volume.

[notouch]

Those are NASDAQ stocks. I see you're following John Carter's set-up but he recommends following the actual stocks (NASDAQ stocks can be traded pre-market) rather than the SSFs. If you are going to look at SSFs I would have thought Dow 30 stocks would be more useful. Just a helpful suggestion...

[Soultrader]

Well... whatever works. I am pretty familiar with what gets traded actively and what doesnt on the SSF's. I am able to spot any changes instantly premarket.