Sunday, March 11, 2007

Trading Opening Gaps - Dummy Setup - Wide Opening Range (WOR), Base and Break Pattern

In lieu of Trading Gaps Dummy Style Part II, I've decided to document different gap setups with entry and exit rules for each. This will enable me to build a library of easily identifiable gap trade setups and perhaps develop success rates based on my own experience.

The first setup in this series is what I am calling the Wide Opening Range (WOR) Base and Break Pattern. I traded two of these on Friday - (NASDAQ:YHOO) and (NYSE: STP) and also found (NYSE:FOE) which I did not trade, on Friday's gapper scan.

As you will note from the following three 15 minute charts, the characteristics of this pattern are as follows:

Opening Range (OR) - wide with little or no shadows - in general, the shadows make up less than 25% of the OR;

Base - consolidation of the gap takes place in the upper/lower third of the OR. The base is usually, but not always aligned with the OR high/low.

Volume - is above average relative to the recent range;

5 Period EMA - Price observes the 5 period EMA (gold MA) as support/resistance.

Wide Range Bars (WRB) - this setup usually has three WRBs including the OR (labelled 1,2, 3). The second WRB is usually the entry bar and the third bar usually marks the end of the move.

Fibonacci Extension - all of the examples below, were successful in tagging the 38% extension.





CAL and JOYG are examples of the WOR Base and Break setup from the past.

Entry rules: Allow the gap to consolidate so avoid trying to enter too early. YHOO was the quickest to break on Friday and I also noticed that it had a much wider gap comparatively speaking. Don't enter until the OR high/low is breached. Ideally you want to enter when the 5 period EMA is close enough to provide reasonable support/resistance in case of a false break. If the base is not perfectly aligned with the OR high/low, draw a resistance line to determine the entry point. In my own trading, I like to buy 2 cents above the base because I want to make sure that price is actually being bid up and not just someone hitting the ask. This strategy works reasonably well when there no spread between the bid and the ask. I use the same two cent margin in setting my stops.

Exit Rules: I used to take a partial after the third WRB, and noticed over time, that staying in the trade rarely generated additional profit and often resulted in a stop out on the second half, so going forward, I will exit 100% as the third WRB completes itself or on a tag of the 38% retracement.




As always, my inspiration for trading gaps dummy style comes from reading Trader-X, Trader Mike, and MaoXian. Don't forget to check the archives and the comments.

17 comments:

Zoomie said...

Great article! Thanks Jamie.

Jamie said...

Thanks Zoomie. Nice entry and exit on the Qs Friday.

bl said...

Good work!

Jamie said...

Thanks BL.

ADD Trader said...

This is such a powerful post Jamie. Thanks for all your work.

ADD Trader

NoGreedNoFear said...

Awesome! I think that setups library will be a hit. Looking forward to your next posts and the stats you get for each of these setups. Thank you for sharing.

Victoria said...

No credit to me? I came up with the library concept several months ago. I just have not developed it fully yet. I do post nice photos though...

Jamie said...

@ ADD Trader and NoGreedNoFear - Thanks for your enthusiasm!

@Victoria - Sorry for the oversight, I thought your library was a photo library. ;) I will make amends on the next post.

Anonymous said...

stop giving away all the edge secrets- took me years to figure this out before u bloggers started

The Addict said...

Thanks for generously sharing your ideas. Good trading to you!

WALL STREET said...

When you get a moment, please take a look at AKAM chart and tell me why the breakout didn't work...IYO
Thanks in advance

NoGreedNoFear said...
This comment has been removed by the author.
Jamie said...

@ Addict and Anon - Thanks for the compliments. Sharing ideas sounds better than giving away edge secrets, but everyone's point of view is welcome.

Simply Options Trader said...

Hi Jamie,
This is a classic post! Hope to see more of these posts :)

OONR7 said...

jaime... thought I had posted a comment before but it didn't show up. In any case, excellent post - thank you for sharing. The question I had is that I noticed on your examples (except JOYG) a NR bar forming afer the #2 entry bar. Have you noticed this occuring in other examples as well?

Michelle B said...

very informative analysis, fleshed out with clear and appropriate chart examples, especially the completion of 3 wide range bars as a handle to close the trade. Kudos, Jamie.

Jamie said...

@ SOT, oonr7 and Michelle B,

Thanks for the feedback!

@oonr7

I do notice a NRB following the 2nd WRB on other examples.