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Day trading using gaps as setups

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JeSSica WaBBit

Joined
3 March 2007
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Hi ASF team,

I would like to have a go at shorter term trading in the coming months, can you please let me know if any of you filter gaps for day trading.

My plan is to filter out stocks that have gapped from the previous EOD price, gap up or gap down, either would be suitable.

I would most likely trade the Nasdaq & NYSE but open to suggestions, so long as it gaps i figure it is fair game.

I would look for shares valued at $10.00 to $100.00 with tight spreads and good volume. Looking to trade between the whole dollar sums, taking up to $1.00 per trade in the perfect trade.

Trading 500 - 1000 share lots.

Stops set according to my calculation of what i am willing to loose but they would be tight and any sign of the trade going against me i would be out.

Essentially the idea is to closely monitor the stock after open, especially the first 30 mins to see if it looks likely to close the gap or if it makes no effort to close the gap and continues to fall away. I would be trading which ever way the trend is going.

Keep an eye on the volume, spread and trend and enter the stock either long or short when probability is most favorable.

Anyone use a method similar to this or know where i might be able to read of similar methods.

Obviously i want to make sure my system and methodology is correct before i put real money on the table.

Over to you guys and girls.................JW
 
Keep an eye on the stocks reporting earnings and know when they are due to report, eg. pre open, during trading hours or post close.

You only have two strategies available to you. The gap might reverse and fill the gap or price might continue in the direction of the gap. I don't have any numbers to indicate what happens more often.

You must keep your losses small. Consider exiting half (500) with a profit and allow the remaining to go longer with a trailing stop. You must get some larger wins to make it worthwhile.

Concentrate on the higher volume better known stocks, favour Nasdaq stocks over Nyse.

Build your watchlist with stocks with the largest atr as % of price.

Don't procrastinate. Prices move the most in the first two/three hours, then there is lunch and plenty more action in the last hour.

When you get good at this you will only need to trade for a few hours a day leaving the rest of your day(night) to do that which wabbits do best.
 
Hey thanks for the response Peter2,

Are you trading with a similar style to this?

There are a couple of things i would like to confirm;

Is a free scanner such as this suitable to filter stocks after the open to find the ones gapping?
http://stockcharts.com/def/servlet/SC.scan

It seems good to me but i would like feedback if there is a better scanning method.

Now you have mentioned ATR, which i understand measure volatility. What is the formula for calculating ATR as a percentage of price?

I undertand the first few hours and last hour for trading is best, thats when i would trade.

Any material you know of to read for this trading method?

JW
 
Yes, those scans look suitable provided that you can get access to them 5 minutes after the open. That gives you 5 mins to select the high volume stocks and stocks > $40.

Now, you need a real time charting and trading platform so that you can monitor the 5 min candles. Don't go any lower than 5 min. This is why you need the high volume stocks. Start with about 6 stocks/day, if you're female then you will be able to handle 10 or 12.

There is a lot of info re day trading US stocks on the net. You should be able to gather trading tidbits that appeal to you from many places. Keep it simple as you must make decisions quickly.

There are business setup costs of course, a trading platform with reliable real time charting (and scanning if you require it), E-signal have monthly costs while IB brokerage is very low. There is a $25K USD account minimum req'd if you intend to day trade US stocks.

I mentioned atr as you want to trade stocks that regularly move > $1.50 / day. Don't waste your time with the $15 stocks, start higher (~ $40+ ). This means you require lots of capital. You must have money to make money. Sad but true in this case.

A backup computer and service is important in case something goes down when you have open trades. Overnight gaps will kill you if you aren't prepared for them.

This is an very intensive way to trade and requires well rehearsed trading plans, excellent discipline and a sound mind. This is not easy and I don't trade this way as I don't have a sound mind.

Day trading ASX stocks using cfds (profitably for 6 months) would be good experience for this type of trading endeavour.

Good luck.
 
Hi Peter,

Great feedback.

Do you have any links to free stock scanners for ASX that will provide me with gapping stocks.

I have Etrade but i can not see this field in their filter.

Anyone will do so long as i can run a scan immediatley after open.


JW
 
JW: Do do this over the the timeframe you propose you will need live data (tick or max 1 minute) for all stocks streamed to a charting program like Amibroker (or some of the data providers will provide scanner tools with the data). That won't come for free I'm afraid. Most free data will have delays of about 30 mins.
 
I am currently using ninjatrader to scalp forex. IB stream quotes real time to ninjatrader and its free. I havent tried this with stocks, but i dont see why it cant do the same. Worth looking into i think.
 
I trade through Etrade but to my knowledge their filters dont offer anyhting for selecting gaps. It has live data coming through but i have t continually refresh the screen. 1,5,15 minute charts are available.

I traded AGO this week after it gapped and its been a beauty, dont see why i can't do the same with other gapping shares.

If i cant get something for the ASX then i am going to open up an account in the USA and trade their. I'll use Esignal.

But i want to have a play with small parcels in the ASX first.

So i have the live feed from Etrade but i need the scanner.

JW
 
Hey thought I;d just save you some effort: do not bother with looking at fading the gaps on the asx.

I have analyzed it alot on the ASX and believe the opportunities to be very limited.

But apparently its good in the US markets.

Would be eager to learn how your testing went there!

Cheers
G
 
Gaps on the ASX, how do you mean? Are you talking about the SPI gvanto, or what?

Gaps can also be used for support, particularly when a previous gap is being filled with a high volume hammer on a daily chart. This is generally a short-term reversal, where you can easily cash in a few %.

You can also trade breakaway gaps, continuation gaps, using the close of that gap as your stop level.

Fading the opening gap is not the only gap play to make money.
 
Yes I did mean ASX gaps on the open.

So intraday gaps are pretty good huh?


Cheers
G
 
Fading the opening gap can be very successful on the YM, ES (only two I have looked at), and it is good to look at volume to determine how powerful the gap is, encase it may perhaps keep running.

The rest of the gaps I talk about, I only use on daily charts for equities.

Haven't looked much at the SPI.
 
Every kind of gap. Depending on how you choose to trade each.
 
MRC & Co said:
Fading the opening gap can be very successful on the YM, ES (only two I have looked at), and it is good to look at volume to determine how powerful the gap is, encase it may perhaps keep running.
Click to expand...

Really? My question to all market cliches is what stats do you have to support this? Then after you frame them in to good R:R setups I think you will find its a lot easier to write "Fading the opening gap can be very successful" than actually trading them.
 

Yes I agree, definately a lot easier to write. As is anything when it comes to trading, but can still be done, despite the cliche surrounding it!

I personally find it successful, despite not having the exact R:R of each written out, I know I am definately in the green. I generally use 0.5:1 at the moment, but have not been fading them long enough to establish stats of much importance. I found market internals very useful with this, provided at TS, but have since switched over to IB and do not get the same features.

As for using gaps in equity plays, I am 1.7 ATM with 60% accuracy for one of my set-ups. That being said, risk is very very small and as such, so is profit. Just to take small portions when the opportunity presents itself.

By no means am I here to teach my versions of gap plays, but for me, they work well (for now at least)!
 
MRC sorry if this may be a dumb question but what are YM and ES?

Good to hear someone is working the gap strategy!

 
YM is the Dow E-mini Futures and ES is the S&P 500 E-mini Futures. Both trade on the CME.
 
Thanks TH.

Nice blog btw.

Does anyone here belong to the Ataa.com.au group? Anyone been to their conferences - any good?

I would like to join I think, even just to get some basic ideas

G
 
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