Looking At Today's Gap Down

by Ryan Mallory

I've received quite a few emails and comments from folks asking about how I trade the gap (when I do) and how do I construct my trade. So I figured we could look at today's open as a case study, even though I didn't trade it this morning (we can talk about that too), what the parameters would have been had I gone through with the trade. I'll try to highlight a few of these over the next couple of weeks, as well as look at some from recent weeks too.

As for now, here is how today's gap worked.

As can see there are a few things to point out here...

1) Jobs report created a pretty big sell-off in the pre-market and scared me off from trading this one.

2) It is under 10 points on the S&P which I tend to only trade.

3) However, had I traded this, my stop-loss would have been the difference between yesterday's close and today's open, which is about .72 cents 1 Reward/Risk Ratio of 1:1. 

4) I've been considering of late possibly making my stop-loss half of the opening gap, which would give me a 2:1 Reward to Risk ratio, which is very good, however, it would result in more stop-outs. But if I am right 33% of the time I break-even and since 80% of all gaps tend to fill, this would probably work out in my favor - still some research for me to do on this though before implementing it.