When you talk about buying into a bigger gap up are you referring to a market gap up (in general) or an individual stock? Leland
The Indexes. The average gap on the Nasdaq is just under 1.2% and it has a 71% chance of filling in, but if you go to a gap that is 3 times larger it only fills in 20% of the time on the day it occurs and 65% of them go up more than down. Brandon
Thankfully this thread has started to grow. The ideas you guys have shared are excellent. William thx for getting this off the ground. Dottom, very interesting about Larry Williams and the fixed stop. My empirical observation supports that thought also, but empirical observation once supported the "fact" that the earth was flat. So testing, if for no other reason than to instill confidence, is required.
Okay, my plan for trading the open is slowly becoming clear. From what I have gathered through thought, research, and talking to others, this is what I have come up with so far- 1. A lot of people like to fade the openings, (sell a gap up in a down market, buy a gap down in a up market) and from this poll it looks like they enter 5-9 minutes after the open. Which makes sense to me, too long after that if you don't get a clear set up or move then something is wrong. ...now if I am wrong in assuming this please speak up, any thoughts/input would be great. 2. Playing a range of the first five minutes or so without the aid of a gap, I find, is not a high percentage play... but, you also have to possibility of a great risk:reward if you know how to manage your trade. So this is all about what fits into your trading plan or style, etc. 3. From my experience I have found non-symmetrical triangles and cup and handles work best for me when playing the open (open being first 30 minutes or so). They appear often enough and work well for me. Some people really seem to like the "U" or just the cup pattern, but I haven't observed this enough to say anything of worth about it... although the few times I do enter this set up it usually works well, but I enter in the longer time frame (10 - 30min. of trading) Any comments on the U set up? 4. This is really a continuation of number 3. and is simple - break of a consolidation or strong resistance, support. Strong meaning it has held multiple times. 5. The major advantage in playing the open, I find, is risk:reward Okay that's enough for now. If I missed something I'll post it tonight, I didn't trade today... but today has been a day ...sigh.
My backtesting supports this theory. Although fading an opening gap is a high percentage play, overall performance is usually hurt by a small number of big losses. A fixed volatitility-based stop improves performance, as long as it is not too tight.
Re: Larry Wiiliam's stop-loss method - the fixed $ amount.. If it is set at max loss of $500, and you are long 1000 shares, that is 50 cents loss. If you entered a position at $50, you would set the sell-stop at $49.50. If the stock is at $51, is your stop STILL at $49.50? No trailing stop? Just exit the position at the close?
Larry Williams usually uses up to 4 types of exits in his systems: 1. fixed $ amount - this is max loss he will take in any trade, usually determined by some level of optimization which I don't completely agree with. I'd rather see something like % of ATR, and if % ATR > max risk or risk/reward parameter then don't take the trade. 2. trailing stop to lock in profits, obviously depending on the system different types of trailing stops are used 3. stop & reverse signal if one occurs 4. exit after X bars regardless of trade result. This type of exit is usually used for his short-term systems, or intraday volatility breakout systems that exit at close or next day's open (playing the nightly follow through on certain setups). I've seen some short-term oscillator systems that exit after 2 or 3 bars regardless of the result. These aren't the "let your profits run" systems but rather higher % plays taking small but more frequent wins.