3SOF

Fading the Gaps.

What is it? - To fade the gap means to trade a gap in the opposite direction.  If the stock is gapping up, you short.. if the stock gaps down you go long.  There are rules to follow that help minimize risk.  You will learn these rules here.  Some traders make a living just doing this.

When? - Fading the gaps is a strategy used in the morning.  At 9:30am there are stocks that will open with a gap up or down.  A position is entered after enough data is printed to make a good risk/reward decision.  The position is usally closed by 10-10:30am. 

Account Requirements - Fading the gap is a day-trading strategy so you will need an account of over 25k to be able to truly profit from these moves.  Margin is almost essential in these plays.  I use 4:1 margin when fading the gap and never carry less than 500 shares.  Stocks selected will have heavy liquidity(over 100,000 shares traded by entry), they will normally be over $20/share and sometimes we will only be looking for 30 cents on a good move.

Tools - First is finding the gaps.  Some of you subscribe to news services that provide gaps.. those are all good to watch.  I use a special Screener that find me the gap.  I will post my screen before mkt open so that everybody knows what choices we have.  Next is the chart we use.  I use a 5-minute chart with standard bollinger bands and a 20ema.

The Purpose - To make money of course but with this startegy you can make money in any kind of market!  It is an essential tool to learn.  If enough people show interest we will start.. and I plan to keep track of the picks in a portfolio eventually. 

Here are some example charts I did a while back in this thread(which has some useful data)
http://www.3stocksonfire.org/trading/index.php?topic=575.0

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Example 1:

June 11, 2005, 11:57:10 PM »
   
this is a perfect fade..

**note: the stop would be @ high of day up to that point...that is an amazing reward to risk ratio

entry: 27.83
stop loss: 27.93
target: 27.45

(for shorting)
reward = entry - target = 0.48
risk =  stop - entry = 0.10
reward to risk ratio = reward/risk = 0.48/0.10 = 4.8 = awesome!



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Example 2:

June 12, 2005, 12:28:02 AM »
   
THE FADE of the day!...a little something special here   

(for shorting)
entry: 37.95
stop loss: 38.18
target: 37.06

reward = entry - target = 1.34
risk =  stop - entry = 0.23
reward to risk ratio = reward/risk = 1.34/0.23 = 5.82 = wow!



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Example 3(going long example):



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Example 4




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Example 5







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Example 6



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Example 7



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Let me know what you think. 

I'm in G. Just one question...

QuoteAccount Requirements - Fading the gap is a day-trading strategy so you will need an account of over 25k to be able to truly profit from these moves.  Margin is almost essential in these plays.  I use 4:1 margin when fading the gap and never carry less than 500 shares.

I'm not sure what you mean by 4:1 margin. I understand margin. And if you have $200k in equity, 4:1 margin would be $800k, right? Are you saying if your account was $200k you would put $800k on a fade the gap daytrade?

Quote from: Lucas Scott on April 10, 2006, 12:52:42 AM
I'm in G. Just one question...

QuoteAccount Requirements - Fading the gap is a day-trading strategy so you will need an account of over 25k to be able to truly profit from these moves. Margin is almost essential in these plays. I use 4:1 margin when fading the gap and never carry less than 500 shares.

I'm not sure what you mean by 4:1 margin. I understand margin. And if you have $200k in equity, 4:1 margin would be $800k, right? Are you saying if your account was $200k you would put $800k on a fade the gap daytrade?

Great question.  On these plays I recommend a minimum of 500 shares.. normally 1-2k shares of stock.  So that means on a 20 dollar stock(buying 1000 shares) we would need around 20k(5k w/margin).. $40..40k(10k w/margin). 

At first it may be difficult to follow more than one position but eventually you may want to expand.  The 4:1 margin is also for other day-trading strategies throughout the day.  I'll look to expand into other strategies if we find enough people interested.

Really interested. Thank you.

More please.

One perfect example of trading gaps is Cramer's Mad Money picks.
Anybody agrees?

This sounds like a promising venture. But how will we know which stocks to play?
Will you send us an email message?

I use a 15-min rule for buying stocks gapping up or down as well as shorting. Mostly I have the intention of going long but sometimes end up shorting. This rule helps a lot to keep you from chasing a stock and gives you 15-minutes instead of 5 and then you also have a stop in place just on the opposite side of the entry line. Waiting the 15 minutes can keep your out of some nice trades but also some failures and has a good track record. It gives a bit more time for the market to access the situation and a break from the range can often be a decent move.

On Friday MRCY gapped up and went down and filled that gap and many would have bought there but this rule keeps you waiting and the % actually are in your favor to wait. It then makes a new high on the second 5-min bar and test it on the third bar so you now have your high and low lines established. In this case you bought on the break out and then place your stop below the line (you use your judgment as to exactly where but in this case likely below the 9-period EMA red line.

This is also a good rule to use if you are holding a stock and it gaps down and you want to get out of that stock -- wait 15-min and watch.......you may end up adding to your position instead.

I agree with lojze  regarding Jim cramers mad money. Many ..many times I have seen within seconds stocks jump 10-20% easy the moment the stocks come out of his mouth. So trade the mad guy .. 

Dont forget about stockster, they would seem to be a gappers dream.

how about bdco its up %10 premarket. Its fluctuates wildly.

G-

I am in as well.  Where will you post th etrades?

Would OLAB be an example??

Super slow to access this website.

It is 9:00pm in Beijing. It is perfect for me to trade from 9:30pm-12:00pm, then I go sleep.

I can scan the whole US market looking for gap up or down in my own Real Time quote program. All data are from US in RT.

That is the beauty of High Speed Internet.

US is far ways from China but the real time data can be received here no delay - 8000 symbols (I only scan 1500 symbols).

ok there seems to be a few of us interested.. I'll start another thread for today 

Careful for anyone considering playing this game with OLAB.....it's China chaos proven pretty much unstoppable by CHNR (which did basically the exact same thing)....check the historical.

http://finance.yahoo.com/q/hp?s=CHNR&a=00&b=23&c=2006&d=01&e=3&f=2006&g=d

I wouldn't even think of shorting OLAB unless it hits mid teens or you are looking for a 10 minute drop (which could make you 10-15%).

JMHO