Morning Gap Strategy: Day trade opening gaps. // Trading the open, stocks & options tips strategies for beginners gappers gap up gap down david moadel
welcome to looking at the markets with David Modell today we're going to go
over a very popular day trading strategy which is trading opening gaps now an
opening gap or morning gap can be defined as when a stock opens higher or
lower than it closed the previous day so for example if the stock closed
yesterday at 30 to 50 then if you wake up this morning and the market opens and
it's 30 it starts off at 30 to 75 that would be a 25 cent gap up and if it
opens at 30 to 20 that would be a 30 cent gap down now a common strategy is
to fade the gap meaning you would take a long position if the stock opens down
hoping that it goes up or take a short position if the stock opens up hoping
that it comes back down so fading the gap really means betting in the opposite
direction of the gap if it gaps up then you're going to take a short position
either by shorting the stock or buying puts on the stock you could also fade
the gap if it gaps down by either buying the stock or buying call options on the
stock the hope is that the opening gap will
fill meaning it will retrace all the way back to the previous day's closing price
so for example if yesterday a stock closed at 30 to 50 and then it opens
let's say it opens this morning at 30 to 20 so then you you know that's a 30 cent
gap down and then you are hoping that the the price of the stock will go all
the way back up to 30 to 50 or yesterday's close that would be a an
example of filling the gap but statistically how often do these morning
gaps actually fill all the way
well here's an example of a gap up that fills the same day all right so here's
Tesla and here's the closing price and then the next morning it opens up here
and then as you can see before the end of the trading day it fills all the way
back down to yesterday's closing price and so you could have shorted the stock
or but or purchased puts on the stock here and then taken profits here and you
would have done pretty well so that's an example of a of a stock filling the
morning gap completely all right and here's an example another example
this is a gap down okay this is sp why this is a gap down that fills the same
day so it closed here and then opened here okay the next morning and as you
can see before the end of the trading day it came all the way back up to where
it closed yesterday right here and actually went a little bit further so if
you had taken a long position here and then taking profits either here or
here or here either way it filled the gap and you would have made a profit so
how often do these opening gaps actually fill well here's some research that I
located on the Internet and please note that I cannot guarantee the accuracy of
the research in this video this is research I found from other people all
right here's one piece of research that I found 65 to 70% of all opening gaps in
equity markets fill the same day all right so you know that's more than half
and 78% of the opening gaps fill at least 50% of the gap meaning for example
over here means they at least come back halfway they retrace halfway so for
example if this was yesterday's closed and then it opened here this one came
back half way and then eventually it went all the way back all right
so 78% of opening gaps fill at least 50% they retrace half way while 68% not as
many fill all the way furthermore taking a long position to fade a gap down
performs a little bit better than taking a short position to fade a gap up so the
probabilities will be a little bit better if you buy the dip basically take
a long position after a gap down as opposed to trying to short a morning gap
up all right and that's all from Scott Andrews and here's the V website
wanted to give credit therefore it seems that we can increase the probability of
success by taking profits at a 50% partial gap fill rather than waiting for
a 100% full gap fill alright and here's an example with s py and here's where it
closed yesterday and then there was a gap up here and as you can see at least
on this chart here it didn't fill all the way down to yesterday's
clothes all right in fact you could even say it
had resistance here are three times it just refused to go all the way down but
if you had taken 50% profits you know if you've just taken profits at
a 50% retracement which between here and here would be about here you would have
done all right all right so let's say you had taken a short position here and
taken profits at a 50% retracement or fill you would have done well if you had
waited for a full retracement it may never have happened it also seems that
we can increase the probability of success by only taking long positions
for morning gap downs as I discussed before and refraining from taking short
positions for morning gap ups in other words only by the dips
don't try to short the morning gap ups and you can increase you increase your
probability of success this makes sense since the stock market tends to have an
upward bias have you ever noticed that that a lot of times the the morning dips
come back up a lot of the time because the stock yeah it's a bull market we're
in right now and so the stock market does tend to go up over time however be
aware that you will have fewer trading opportunities if you only trade gap
downs so if you choose only to go long and not too short then you're going to
have going to have fewer fewer trading opportunities so be aware of that here's
some more research that I located approximately half of all large opening
gaps with large being defined as more than 40% of the previous day's range and
so you would have to check the previous day's high and low all right
so approximately half of large opening gaps don't fill during that coming days
action while 80 to 90% of small opening gaps with small being defined as less
less than 40% of the previous day's range will fill during the coming days
action and the source of this I found is Brett Steen Barger and there's the
source of that all right so you know there's a conclusion to be drawn here is
that you're probably better off only focusing on the small opening gaps which
have a much better probability of filling than large opening gaps
in a study lasting 962 trading days it was found that SP why closed its opening
gap on 696 of those days or about 70% of the time when the opening gap or down
when the opening gap up or gap down was greater than point 35 percent in other
words a a large larger gap the gap was filled only on 97 of those days which is
less than half the time when the opening gap up or down was less than point 35
percent in other words a small gap the gap was filled on 599 of those days
which was about 80 percent of the time and that source was Bret Steinberger
again and there's the source so once again
you're better off focusing on small opening gaps you'll have a much higher
probability of success statistically according to that research
and even over longer time frames even if you're not a day trader you know even
over longer time frames of 30 to 60 days it still seems that large opening gaps
don't fill very very reliably tasty trades research found that large gaps
meaning more than one standard deviation in size filled less than 20 20 % of the
time while very large gaps very large gaps
more than 1.1 and a half standard deviations in size filled less than 16
percent of the time and they actually gave it not just the rest of the day but
thirty to sixty days and that source is here it's a it's a tasty trade video
there so what's the conclusion well if you're going to fade opening gaps as a
days as a day trading strategy first of all truly treat it as a day trading
strategy close out all of your positions before the end of the trading day and
use stop-loss orders to limit your potential losses know ahead of time
whether you're going to wait for a partial 50% fill or a full 100% fill to
take profits personally I don't mind taking the smaller 50% profit because
that will increase the chances of success
don't try to fade large opening gaps and we can define a large gap as being more
more than 40% of the previous day's range and so check the high and the low
of yesterday's price action in the stock find the range and then you know you can
calculate 40% of that anything more than that could be defined as a large gap and
you might not want to try to fade that gap only go for the smaller ones only
trade stocks and ETFs with plenty of volume and liquidity that's super
important you don't want to have trouble with the bid and ask spread that kind of
thing and finally because of the stock market's upward bias especially in that
bull market that we're in right now I prefer to concentrate on buying the
morning dip with a long position rather than trying to short a morning gap up
however shorting gap ups is a viable strategy for people who want more
opportunities to trade okay so I hope this was helpful thank
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really need to have one you can email me at any time my name is David Modell and
you can email me at David Modell at gmail.com thank you so much for watching
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