Trading the Gap at the Open

If you were a participant in today’s market, then you probably have whiplash from all of the swings in price that took place. This month in general has been very difficult for day-trading. I’m sure that there have been plenty of success stories but for us and our style, while we are profitable on the month, we’d like to be doing better, to say the least.

Today was a perfect example  – we faded the the gap up at the open using (SPY), the trade emerged so quickly, that we were unable to send out a trade-alert in time for our subscribers to capitalize on. But notice once the housing report came at 10am how the market reacted negatively to the trade and closed the gap. This was bound to happen as long as the report didn’t blow away numbers, because the market was up at the open solely in anticipation of the report which gives us a classic ‘Buy the Rumor, Sell the News’ scenario. The risk reward was also favorable at about 1.5 to 1.

So what did we use as our trade parameters? we waited for the first 5 minute candle to form. After the first candle was formed, you had what we call a doji or spinning top, which typically means there is indecisiveness by traders as to overall direction. In this circumstance because the market gapped up, and showed such a reluctance to further extend the gains, the candle pattern was in favor of the bears.

Our entry on this trade was a break of the low of the first 5 minute candle – when that happens, the gap has then started its fill. The stop-loss that we set was just above the intraday high of the day. So in this circumstance we had a stop loss of 0.40/share (90.31 entry, 90.71 stop-loss). Once the gap was filled (at the dotted line on the chart) we exit out of the trade for a gain of 0.66/share.

So there you have it – our trade today at the open. As for our other trade later in the day…well lets not talk about that one!