As of 11/20/2024   Indus: 43,408 +139.53 +0.3%     Trans: 17,002 -26.31 -0.2%     Utils: 1,055 +1.25 +0.1%     Nasdaq: 18,966 -21.33 -0.1%     S&P 500: 5,917 +0.13 +0.0%	YTD  +15.2%    +6.9%    +19.7%    +26.3%    +24.1%	Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

As of 11/20/2024   Indus: 43,408 +139.53 +0.3%     Trans: 17,002 -26.31 -0.2%     Utils: 1,055 +1.25 +0.1%     Nasdaq: 18,966 -21.33 -0.1%     S&P 500: 5,917 +0.13 +0.0%	YTD  +15.2%    +6.9%    +19.7%    +26.3%    +24.1%
Targets    Overview: 11/12/2024     46,000 or 43,000 by 12/01/2024   18,000 or 16,600 by 12/01/2024   1,075 or 1,000 by 12/01/2024   20,000 or 18,400 by 12/01/2024   6,100 or 5,800 by 12/01/2024
Chart Pattern Indicator: on 11/18/24

Bulkowski's Opening Gap Trading Setup -- Long Side

My book, Swing and Day Trading, dedicates an entire chapters to the opening gap setup, starting on page 203. I picture it on the left. For more information on the setup, buy the book.

If you click on the above link and then buy the book (or anything) while at Amazon.com, the referral will help support this site. Thanks.

$ $ $

The following discusses a day trading setup that uses a downward price gap at the open. For information about an upward gap (short sale), click here.

Updated 12/25/16

Opening Gap: Background

The opening gap trading setup relies on a large downward price gap when the market opens for the day and a retrace of price into that gap.

Because the efficacy of this setup has changed over time, be sure to do your own research before trading using this or any other setup listed on this website.

Opening Gap: Methodology

The following figure shows the ideal opening gap trading setup. The vertical line separates the first day from the second on a 5-minute chart. At candle B, price gaps open lower than candle A which ended trading the prior day. Price may or may not continue trending downward. If it does, then it's best that the move down is a strong one, without consolidation regions, candles with small shadows, and little price overlap between bodies.

In this example, price reverses at candle B by forming a tall lower shadow. This is a hint that the bears have begun buying the stock after realizing that it is oversold. The next candle, C, confirms this when it fails to make a new low and the body is white. Use this candle as the signal candle, meaning place an order to buy the stock a penny or two above the candle's high. The order executes at candle D. Immediately place a stop below the low at candle C (or keep the stop order in your head). If price reverses, the stop will take you out.

As price rises, raise the stop but don't keep it too close. When price passes the 38% retrace of the AB move then switch to the 1-minute scale and move the stop to a penny or two below the low of the prior candle. Raise the stop to the low of the prior candle as each new candle forms. For candles with long lower shadows, a stop two candles back may work better.

Let's assume that we switched to the 1-minute scale. Price closes lower at candle F but both E and F are small candles. Small candle bodies mean indecision: The bulls and bears are fighting it out to determine direction. The tall upper shadow on candle E suggests that price is about to reverse, and the black candle at F supports this. At candle F, lower the stop to a penny or two below candle E, as shown. Candle F gets you out of the stock by tripping the stop.

More

Opening Gap: Checklist

• The Nasdaq used to provide a free heatmap showing premarket trading activity. The page showed a square of stocks, arranged by how much they have moved premarket and coded by color. However, they appear to have abandoned that resource. Visit the Nasdaq for premarket trading activity.
• Use the 5-minute chart for entry, the 1 or 2 minute chart to better time the exit
• Look for a large downward price gap from the prior day
• For profit potential, measure from the prior day's high to the trend low today then take half of it
• If price continues moving down after the gap, look for few or no consolidation regions, and tall candles with short shadows
• When the candle color changes from black to white and price fails to make a new low, place an order to buy a penny or two above the candle's high (at candle C in the figure)
• Place a stop a penny or two below the candle's low
• Follow price upward, raising the stop as appropriate. Use the middle of especially tall candle bodies as the stop location or a few pennies below the low of short candles. If the candles have tall shadows, then place the stop two candles back unless that puts the stop too far away
• When price retraces the prior down move by 38%, then switch to the 1 or 2 minute chart to time the exit
• Use the prior candle's low (candle E in this example) as the stop location (unless the candle is unusually tall, in which case cut the body in half and use that price)
• Raise the stop as price rises until it takes you out

More

Opening Gap: Research

On Christmas day, I had some spare time and a person asked me about the numbers. So I updated the research and this is what I found.

Using a 3% gap size or larger, I tested the three decades for the gap closure rate for full and half gaps. A half gap is half the distance from the prior day's close to today's opening price. See the table.

I used data form 520 stocks, but not all stocks covered the various periods.

As the table shows, the retrace worked much better in the past. For example, in the 1990s the gap closed 50% of the time. Today, it's down to 23% close.

The half gap shows a similar trend. In the 1990s, price retraced half the gap 72% of the time. In the 2010s, price only reached the halfway mark 56% of the time.

Opening Gap: Example 1

Of the two examples, this one is more successful. Price forms a 4-price doji at A. The next day, price gaps lower, bottoming at B. Candle C shows a color change so you place a buy order a penny above its top, or 50.74 and a stop a penny below its low, at 50.60. The target is midway between the high price at A (51.64) and the low at B (50.51) or 51.08. Remaining on the 5-minute scale and noticing that candle D is a tall one, you would take half its body height as the stop price. That would be: 50.90 + (51.21 - 50.90)/2 or 51.06. Candle E takes you out for a profit of 51.06 - 50.60 or 46 cents or $460 on 1,000 shares.

As candle D approaches the price target of 51.08, you switch to the 1-minute scale. If you place a stop below the low of each candle as price climbed, you would have been stopped out at 51.11 for a profit of 51 cents or $510.

More

Opening Gap: Example 2

The chart shows Alcoa on 10/22/2007 during the opening minutes on a 5-minute chart. Price gaps open lower from candle A to B, a price range of about $1.10 (37.80 - 36.70). Half of this range would be 55 cents for a target price of 36.70 + 0.55 or 37.25. Candle C changes color to green, so we place a buy order a penny above its high, or 37.00. The order fills during candle D. This candle rises above the target price (37.25) with a high of 37.27 and since it's an unusually tall candle, we take half its body height and place a stop there (37.27 - 36.91 = 36 cents for a body height. Half this is 18 cents added to the open gives a target of 36.91 + 0.18 or 37.09). Candle E stops us out or you can use the low at E as the stop location. The next candle would stop you out at 37.06.

Once price neared the target, if you switched to the 1-minute scale, you could have narrowed the exit considerably by using the prior candle low as the exit price. In this case, you would have been stopped out at 37.23 for a profit of 23 cents or $230 on 1,000 shares.

-- Thomas Bulkowski

More

See Also

• These other trading setups may interest you.
• Review the performance of gaps. The results may surprise you!
• A rising window has an upward gap.
• A falling window has a bearish gap.
• This discusses a gap trading setup from the short side.

I don't have a beer gut. I have a protective covering for my rock hard abs.