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 -- Short 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 an upward price gap at the open. For a downward gap (long trade), click here.

Updated 12/25/16.

Background
Methodology
Checklist
Research
Example
See Also

Opening Gap: Background

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

Research shows that at least half the gap fills 84% of the time, but that is for all gap sizes (as small as a penny) from 1/1/1990 to 12/25/2016 using 520 stocks. Not all stocks covered the entire period. The larger the gap, the less chance of it filling by subsequent price movement.

When I first tested this setup years ago, it held promise but like many trading setups, it has become less effective than it once was. Test it using your own data, in your own markets, and change it to suit your trading style.

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 higher than candle A which ended trading the prior day. Price may or may not continue trending upward. If it does, then it's best that the move up is a strong one, without consolidation regions, candles with small shadows, and little price overlap between bodies.

The opening gap setup

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

As price drops, lower the stop but don't keep it too close. When price passes the 38% retrace of the AB move, switch to the 1-minute scale and lower the stop to a penny or two above the high of the prior candle. Lower the stop as each new candle forms (using a penny above the prior candle's high as the new stop price). I show the 50% target as a horizontal green line, so let's assume this is on the 1-minute chart.

Here, price closes lower at candle F but both E and F are small candles. That means indecision: The bulls and bears are fighting it out to determine direction. The tall lower shadow on candle E suggests that price is about to reverse. At candle F, lower the stop to a penny or two above candle E. When candle F completes, lower the stop again to the position shown (a penny or two above the high at F). Candle G gets you out of the stock by tripping the stop.

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Opening Gap: Checklist

Opening Gap: Research

 Period Full Gap
Closure Rate
Half Gap
Closure Rate
1990s48%69%
2000s35%63%
2010s23%51%

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, this setup worked much better in the past.

For example, in the 1990s, 48% of the gaps filled completely (closed) sometime during the same trading day. In the 2010s, the closure rate had sunk to just 23%. Wow.

In the 1990s, price retraced half the gap 69% of the time. Today, price reaches mid gap 51% of the time.

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Opening Gap Example

The opening gap setup using Dupont The chart shows an example of the opening gap setup on the 5-minute scale for DuPont. Price closes the prior day at A and gaps upward to candle B. Candle C is the signal candle, one that changes color. Even though price makes a higher high on this candle, a short a penny below the lowest low would work well.

 

Entry is at 47.63 with a stop of 47.90, a penny above the high. Since the stop is far away from the low, once into the trade lower the stop to a closer point.

 

Price makes a strong move down at candle D, piercing the 50% retrace of the AB move. The low at A is 46.57 and the high at C is 48, for a midway target of 47.29. Since candle D bottoms at 47, switch to the 1-minute scale as price nears the target (see next chart).

 

The opening gap setup

This is DuPont on the 1-minute scale. The target is 47.29, so if you switched to the 1-minute scale any time after candle B, you could have used a penny above the top of the prior candle as the stop price. This method would have taken you out of the trade at candle A, which has a high price of 47.39. This trade would have made 47.63 - 47.39 or 24 cents a share.

-- 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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