"quote: -------------------------------------------------------------------------------- Originally posted by vhehn friends dont let friends buy gap ups. -------------------------------------------------------------------------------- Funny =) But really? Why?" because fading opening gaps is the hi precentage play.
One problem you'll encounter is that you won't often have a nice trending day in one direction without a large enough correction to stop you out. Play with different exit strategies and you'll see what I'm talking about. Do you use a trailing stop with fixed point size, x-bar stoploss, x-%-ATR stoploss, or do you use profit targets? So with an opening break strategy, you may get the initial leg up, but will be stopped out somewhere along the line and miss a good portion of the move. Some, like Larry Williams, advocates once you have an opening break play, use a fixed money-management stop, then just hold the position until closing. Williams claims that makes more money over time than any form of trailing stop.
Dottom, Thanks for your post. As for trailing stops vs. profit targets, I usually use a trailing stop until lunch time, which is when I like to be flat. Sometimes I'll use a 1:2 risk:reward for exit if the trade was taken on a five minute break. But to be honest I really don't have a solid plan regarding the open. I started this thread in hopes I could form one. That bit about Larry Williams was interesting. It would be nice to learn more about this. I'm assuming it's a book your referring to?
Books and various interviews/seminars where Larry Williams has been quoted, he advocates that in all his system testing, he has always had better results with a fixed money-management stop than a trailing stop. Specific to opening day range/volatility breakout type plays, Larry advocates setting a money-management stop and exiting position at close. He believes a trailing stop loss stops you out of additional profits more often than it limits your losses. Hence, the money-management stop (say $1000 if you were trading ES emini) prevents large losses while keeping you in the game. I think he discusses this in Long Term Secrets to Short Term Trading which was a decent read if you're a systems trader. It's been a while since I read it. I don't like his approach to optimization, but he had some good ideas. As with all suggestions, I recommend thorough back-testing to determine what strategies work, and specifically what works for your style of trading.
Dottom, Thanks again. It does sound like Larry has some good ideas. I'll have to check him out sometime. By the way, how do you trade the open? What kind of stratigies do you use?
It really depends on the gap. The bigger the gap, the more likely it is to be one you should buy. Brandon