How to Enter the Trade
As with when to trade, how to enter depends on whether the stock gaps up/down or not. Typically, the stock price doesn’t gap up or down and the entry price is based on the previous day’s prices. When the stock gaps up or down, the entry price is not based on the previous day’s prices, but on the current day’s prices. Whether based on the previous day’s prices or the current day’s prices, the entry rules are the same.
• The most common occurrence – the stock opens within 50 cents ($0.50) of the previous day’s close – buy the stock the moment it trades 6 cents (1/16) above the previous day’s high. This can be accomplished by using a buy stop order. This increases the likelihood that the price is moving in the direction of the bullish (long) trade.
• Occasionally a stock gaps up or down 50 cents or more – buy the stock the moment it trades 6 cents above the high of the new day. This would be 30 minutes after the market opens for a gap up or 5 minutes after the market opens for a gap down.
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Opening Gap
Definition:
Many day trading markets open and close at specific times each day, such as opening at 8:30 AM and closing at 5:30 PM. If the market opens at a different price than it closed the previous day, the market has experienced an opening gap. This price pattern is called a gap because on a trading chart there will be a gap (blank space) between the closing and opening prices. Opening gaps can be caused by news releases or other events that happen while the market is closed, or by traders deciding what prices they will trade at, and placing their orders, before the market opens.
There are several different types of opening gap, with the most common being the following :
Full Gap Up
A full gap up occurs when the market opens at a price that is higher than the previous day’s high. For example, if the previous day’s high was 5000, and the market opened at 5050, there would have been a 50 point full gap up.
Full Gap Down
A full gap down occurs when the market opens at a price that is lower than the previous day’s low. For example, if the previous day’s low was 3150, and the market opened at 3010, there would have been a 140 point full gap down.
Partial Gap Up
A partial gap up occurs when the market opens at a price that is higher than the previous day’s close, but lower than the previous day’s high. For example, if the previous day’s close was 4500, and the previous day’s high was 5000, and the market opened at 4560, there would have been a 60 point partial gap up.
Partial Gap Down
A partial gap down occurs when the market opens at a price that is lower than the previous day’s close, but higher than the previous day’s low. For example, if the previous day’s close was 3650, and the previous day’s low was 3400, and the market opened at 3630, there would have been a 20 point partial gap down.
Also Known As: price gap, market gap
From Adam Milton, Your Guide to Day Trading.
