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.