As of 10/11/2019
  Indus: 26,817 +319.92 +1.2%  
  Trans: 10,292 +224.65 +2.2%  
  Utils: 867 -5.54 -0.6%  
  Nasdaq: 8,057 +106.26 +1.3%  
  S&P 500: 2,970 +32.14 +1.1%  
YTD
 +15.0%  
 +12.2%  
 +21.6%  
 +21.4%  
 +18.5%  
  Targets    Overview: 09/30/2019  
  Up arrow27,600 or 25,600 by 10/15/2019
  Up arrow11,100 or 9,700 by 10/15/2019
  Up arrow900 or 850 by 10/15/2019
  Up arrow8,300 or 7,700 by 10/15/2019
  Down arrow2,825 or 3,050 by 10/15/2019
As of 10/11/2019
  Indus: 26,817 +319.92 +1.2%  
  Trans: 10,292 +224.65 +2.2%  
  Utils: 867 -5.54 -0.6%  
  Nasdaq: 8,057 +106.26 +1.3%  
  S&P 500: 2,970 +32.14 +1.1%  
YTD
 +15.0%  
 +12.2%  
 +21.6%  
 +21.4%  
 +18.5%  
  Targets    Overview: 09/30/2019  
  Up arrow27,600 or 25,600 by 10/15/2019
  Up arrow11,100 or 9,700 by 10/15/2019
  Up arrow900 or 850 by 10/15/2019
  Up arrow8,300 or 7,700 by 10/15/2019
  Down arrow2,825 or 3,050 by 10/15/2019

Bulkowski's Opening Gap Trading Setup -- Long Side

 

My book, Swing and Day TradingSwing and Day Trading: Evolution of a Trader book., 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.

-- Tom Bulkowski

$ $ $

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

Background
Methodology
Checklist
Research
Example 1
Example 2
See Also

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.

The opening gap setup

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.

 

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Opening Gap: Checklist

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Opening Gap: Research

 Period Full Gap
Closure Rate
Half Gap
Closure Rate
1990s50%72%
2000s40%68%
2010s23%56%

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

ABT stock in the opening minutes of 10/22/2007

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.

 

 

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Opening Gap: Example 2

AA stock in the opening minutes of 10/22/2007

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

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See Also

 

Support this site! Clicking any of the books (below) takes you to Amazon.com. If you buy ANYTHING while there, they pay for the referral.

My novels:      New                  Bumper's Story Head's Law

Chart Patterns: After the Buy Getting Started in Chart Patterns, Second Edition Trading Basics Fundamental Analysis and Position Trading Swing and Day Trading Visual Guide to Chart Patterns Encyclopedia of Candlestick Charts Encyclopedia of Chart Patterns 2nd Edition Trading Classic Chart Patterns

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