often than not. I tend to not like that advice. While it works well when the market complies with the rule, it's downright dangerous on days when the market just gaps and runs.
Rather than fixed rules, I prefer to treat each opportunity in the market as a unique occurrence and trade it based upon what is actually occurring (rather than what statistics tells me should occur most often).
Look for price to establish an open range with the first one-minute candle. Then look at the price action as it interacts with the edges of this range, to find signs of strength and weakness. Who's winning the battle, the bulls or the bears?
Essentially, it’s standard “opening-range breakout” theory, if you want to do some research on that. Although, I use a much shorter timeframe (1-min) than most people do in establishing an opening range (5 or 15 min). This technique just establishes the initial bias direction. Ongoing bar-by-bar analysis may vary my bias.
Let‟s look at how I do this via two examples – an easier one and a harder one. The Trade Examples in Chapter 10 will also include a whole hour of a TF session, trading from a gap open, providing a third example of gap open technique.
Example 1: E-mini Russell, 25th March 2011, gap up opening.
We are looking for price to establish an opening range. In this case, the first candle sets that up nicely, producing a mid-close candle, establishing an opening range via its high and low. We now watch for price interaction with the high or low of the range, seeking signs of strength or weakness.
As show below in our lower timeframe, the blue lines represent the opening minute of one-range price action (A). Following that time period, price pushed against the high of the opening range for 44 seconds (B) before breaking higher. This initially appears to be a sign of bullish strength.
However… if there really was bullish strength, then the breakout should continue to reach further highs. It failed to do so. The higher prices were unable to attract sufficient bullish orderflow to continue higher… indicating weakness in the bulls. This set up an opportunity short, for those who were quick to react as price broke downwards (C).
Figure 9.9 – E-mini Russell - 25th March 2011 – Gap Up Opening - 1
Figure 9.10 – E-mini Russell - 25th March 2011 – Gap Up Opening - 2
Those who missed the counter-flow entry, or who wished to delay their bias decision (awaiting confirmation or non-confirmation through watching price react at the lower boundary of the opening range), were provided with their first short entry just a few minutes later as price completed its first pull back from the move lower.
Example 2: E-mini Russell, 21st March 2011, gap up opening
They‟re not all as easy as the last one.
The market gapped up strongly on the morning of the 21st March. The diagram below shows the trading timeframe on both the left and right sides; the left side demonstrating the size of the gap;
and the right side zooming in to the post-gap trading timeframe candles.
Figure 9.11 – E-mini Russell – 21st March 2011 – Gap Up Opening - 1
As seen above, this example is one in which the price whipped up and down from the opening range, before finally establishing its bias – sideways with a slight bullish tendency.
Looking at the lower timeframe scalping channel we can see the danger that occurs at market open time…
Figure 9.12 – E-mini Russell – 21st March 2011 – Gap Up Opening - 2
Price broke above the opening range at point A and proceeded to rally another point before reversing. Note the difference when compared with the previous example, that demonstrated difficulty in continuing to new highs after the break above the opening range high. Here it occurred relatively easily. This makes the breakout failure much more difficult to assess in this case.
Unless you felt the inability to rally higher (at the reversal point), there was little reason to go short at B. And to make it worse, if you tried to enter long at C or D through limit orders then you were starting off the session with a drawdown as it provided a quick losing trade.
The breakout below E stalled a bit sooner, offering a nice 123-pattern based entry long at F (¼-line) – much easier to see than the reversal at the top. However once again this required you to be exact with your assessment of bias and quick with your entries.
And then at G we again broke out to the upside.
For those interested, the NYSE Tick remained above zero throughout, indicating bullishness in the wider market.
The outcome of the initial opening range sequence could be a great profit, or a great loss, depending on your ability to read the whipsaw price action.
Subsequent price action settled down into its sideways range with slight bullish bias, and offered significant opportunity IF you were able to correctly assess that bias and take lower entry prices (¼-line and 0-line for example).
Figure 9.13 – E-mini Russell – 21st March 2011 – Post-Gap Opportunity
I encourage you to study opening gap breakout techniques, if they‟re applicable to the markets you trade, and practice them regularly via sim and market replay.
However I will also ask you to show caution. The first trade example offered great potential if you were quick to get in. This second example may have provided either great profit or loss – it‟s not possible to know how you would have read it in real-time.
In both cases though… it was only a few minutes till price settled down into a clear bias and provided great opportunity for the remainder of the session. In the first example you would have had to wait only 5 minutes for your first trade. In the second example you would have had to wait for 7 minutes.
So the lesson here: don’t rush your initial assessment following a gap opening. If you’ve got a clear signal, take it. Otherwise, wait. There is nothing worse than starting a session with a stupid rushed trade resulting in a loss.
And I promise… the market will punish you more often than not when it whipsaws, such as demonstrated in this example.