Sunday, October 22, 2006

Trading Gaps Dummy Style - Part I

I've been getting a lot of email and comments concerning my dummy style gap trades lately, so I thought it might be useful to write a post and answer all of the queries at once.

My objective in gap trading is to profit from high volume (momentum) after the stock consolidates the opening gap. The consolidation usually presents a low risk entry opportunity ie. dummy entry point. For the purposes of this post, I am excluding gap fade and gap fills. In other words, I'm concentrating on long gap ups and short gap downs.

Sources I use for identifying potential gapper candidates:

1.Pre-market top trade counts from my IB (Interactive Brokers) platform;
2.Esignal; gapping up and gapping down lists found in the Live -In Play section or posted daily over at Trader Mike's blog in the morning Watchlist post. - Unfilled Gaps
5.Trade-Ideas gapper scans; Realtime Extra - User defined scans.

For more sources check out Trader-X's list.

I've received a lot of questions regarding as a scanning tool. Again, I just want to point out that Trade-Ideas is my preferred scanning tool, however, due to limitations of the workplace, I use because it is available on any computer through the internet and requires no downloads.


I run two scans as follows:
Gap up - Average daily volume > 300k; Price > $10.00 and < $150.00; and today's open > yesterday's close.

Gap down - Same as the gap up for volume; Price > $20.00 and < $150.00; and today's open <> low.

For some reason, the gap down scan usually results in a much longer list than the gap up. I'm still looking for ways to filter out some of the noise and concentrate on the big volume movers.

The great thing I like in is that I can download the scan results into two separate folders and quickly run through all of the charts on both the daily and 15 minute timeframes.

Identifying Good Candidates

The criteria I use for spotting high probability gapper setups for long entries are:

From the daily timeframe:

Ideally, the gap up has broken out of a consolidation pattern or a base on the daily timeframe. I avoid stocks that are moving up towards a downsloping 50 MA if the MA is too close as it will act as resistance and could force an early exit. Flat MAs are less of a problem especially if the stock has been in a bullish base for a long period of time. The daily view is a good place to identify price targets from resistance areas. If the stock is hitting 52 week highs, I go back to the weekly or monthly timeframe.

From the 15 minute timeframe I look for:

High volume relative to recent volume levels.
Candlestick patterns - Wider bullish sticks on the open followed by a tight consolidation in the upper part of the opening range or, an orderly pullback towards the rising 10 period EMA. I define an orderly pullback as small sticks with little or no overlap of the real bodies on declining volume.

The other pattern to look for is the shallow rounded base consolidation pattern that Tom C. and Trader-X refer to as the "U". The shallow base is a very bullish setup on its own, but combined with a gap up, it can be particularly powerful.

Things I try to avoid:
Extremely wide opening ranges and low volume.
Choppy price action and bar by bar shakeouts.

In Part II (later this week), I will discuss my entry and exit techniques.


Simply Options Trader said...

Hi Jamie,
By law of gravity, I guess its always easier for stocks to come down than to climb up, hence a longer list for gap down than gap up.

A couple of pts for clarification:

-how wld u define extremely wide opening ranges? More than X dollar or X% of stock price?

-how wld u define high vol. on 15 min chart? I'm currently using 60 EMA on vol as an indication. This is what I use on swing trades, not sure if its applicable here?

I'm still learning abt dummy style for day trading, so pls pardon my list of questions :)Thanks again & appreciate this insightful sharing.

AJ said...

Hi Jamie,
Could adding a Block trade filter for your existing Gap Down screen help reduce the noise? Maybe a Block trade of 10,000.

TJ said...

Hi Simply Options Trader,

The wider the opening range, the farther away price is from the 10 period MA. At some point during the trading day, price and the MA are going to come together, so for me, an extremely wide bar on the open has passed me by and I don't want to chase it.

High volume is relative to the volume immediately preceding the gap. I'm usually looking at five days worth of data on my 15 minute timeframe so I want to see volume on the gap up that is significantly higher than the average for the preceding four days.

Questions are good. I have to be sensitive to my audience.

TJ said...

Hi AJ,

Thanks, that's a great idea. I'll look into it but I think its a little too sophisticated to program in Maybe the Trade-Ideas scanner is good for it.

Anonymous said...

Hi Jamie,

Great post. can you eleborate more on the so call "U" or shallow rounded base consolidation. what should we look for relative to the bars preceding it? and why is it so powerful? thanks again.

Anonymous said...

You talked abt stocks at 52 wks high or low. What abt for gapping stocks that are at ALL time high or ALL time low, do you trade them?

The WHY-Trader

Anonymous said...

Good post - one of the "lists" that I use for my dummys is on stocks that have had a large intraday gap down off of news. Take a look at GM for example over the past three weeks. They had a huge gap down two Fridays ago off of a news event and have worked their way back to about the starting point. Every day practically in the interim they have been good for a good solid scalp. You know that they will be bought because other traders have been buying them and you can depend on the volume and volatility so it saves a little time and effort looking for positions.

I'm currently watching CTXS and RHAT and hope to "harvest" them frequently over the next several weeks.

This is a good Log - good luck to you.

Trader-X said...

Good post.

TJ said...

Hi Andrew,

I will elaborate on the U in part 2 and hopefully answer all of your questions.

Thanks for the feedback.

TJ said...

Hi Why,

Yes, blue skys are the best.

TJ said...

Right on John W!

I did the same with US Steel - symbol X this month. I first spotted it on a gapper scan on October 5th and I've been trading it ever since. It's been by far my biggest money maker this month.

TJ said...

Thanks X,

Just following the master and trying to make it my own. :)

downtowntrader said...

Nice post Jamie, I hadn't thought about using for gaps. I'll have to check it out.


TJ said...

Thanks DT.

Cal said...

great post Jamie, I've been wondering every damn morning at 10:15am, how this guy in Canada is banking more than 1pt. gains each day using gapper scans. Sheesh, recipe is being revealed, what's better than that! hah, thanks!

Anonymous said...

how do you get the list of premarket movers off IAB?

TJ said...

Thanks Cal

TJ said...

Hi DFitz,

Welcome to the blog.

Using TWS build 863.5, go to Page on top of the screen and on the drop down menu select Create Market Scanner. Go to the parameters section and left click to get the drop down menu. From there you have a vast array of selections including top trade counts. You can create several pages and add filters as well.