Morning Gap Strategy: Day trade opening gaps. // Trading the open, stocks & options tips strategies


Morning Gap Strategy: Day trade opening gaps. // Trading the open, stocks & options tips strategies for beginners gappers gap up gap down david moadel welcome to looking at the markets with
David Modell today we’re going to go over a very popular day trading strategy
which is trading opening gaps now an opening gap or morning gap can be
defined as when a stock opens higher or lower than it closed the previous day so
for example if the stock closed yesterday at 30 to 50 then if you wake
up this morning and the market opens and it’s 30 it starts off at 30 to 75 that
would be a 25 cent gap up and if it opens at 30 to 20 that would be a 30
cent gap down now a common strategy is to fade the gap meaning you would take a
long position if the stock opens down hoping that it goes up or take a short
position if the stock opens up hoping that it comes back down so fading the
gap really means betting in the opposite direction of the gap if it gaps up then
you’re going to take a short position either by shorting the stock or buying
puts on the stock you could also fade the gap if it gaps down by either buying
the stock or buying call options on the stock
the hope is that the opening gap will fill meaning it will retrace all the way
back to the previous day’s closing price so for example if yesterday a stock
closed at 30 to 50 and then it opens let’s say it opens this morning at 30 to
20 so then you you know that’s a 30 cent gap down and then you are hoping that
the the price of the stock will go all the way back up to 30 to 50 or
yesterday’s close that would be a an example of filling the gap but
statistically how often do these morning gaps actually fill all the way well here’s an example of a gap up that
fills the same day all right so here’s Tesla and here’s the closing price and
then the next morning it opens up here and then as you can see before the end
of the trading day it fills all the way back down to yesterday’s closing price
and so you could have shorted the stock or but or purchased puts on the stock
here and then taken profits here and you would have done pretty well so that’s an
example of a of a stock filling the morning gap completely all right
and here’s an example another example this is a gap down okay this is sp why
this is a gap down that fills the same day so it closed here and then opened
here okay the next morning and as you can see before the end of the trading
day it came all the way back up to where it closed yesterday right here and
actually went a little bit further so if you had taken a long position here
and then taking profits either here or here or here either way it filled the
gap and you would have made a profit so how often do these opening gaps actually
fill well here’s some research that I located on the Internet and please note
that I cannot guarantee the accuracy of the research in this video this is
research I found from other people all right here’s one piece of research that
I found 65 to 70% of all opening gaps in equity markets fill the same day all
right so you know that’s more than half and 78% of the opening gaps fill at
least 50% of the gap meaning for example over here means they at least come back
halfway they retrace halfway so for example if this was yesterday’s closed
and then it opened here this one came back half way and then eventually it
went all the way back all right so 78% of opening gaps fill at least 50%
they retrace half way while 68% not as many fill all the way furthermore taking
a long position to fade a gap down performs a little bit better than taking
a short position to fade a gap up so the probabilities will be a little bit
better if you buy the dip basically take a long position after a gap down as
opposed to trying to short a morning gap up all right and that’s all from Scott
Andrews and here’s the V website wanted to give credit therefore it seems
that we can increase the probability of success by taking profits at a 50%
partial gap fill rather than waiting for a 100% full gap fill alright and here’s
an example with s py and here’s where it closed yesterday and then there was a
gap up here and as you can see at least on this chart here it didn’t
fill all the way down to yesterday’s clothes
all right in fact you could even say it had resistance here are three times it
just refused to go all the way down but if you had taken 50% profits
you know if you’ve just taken profits at a 50% retracement which between here and
here would be about here you would have done all right all right so let’s say
you had taken a short position here and taken profits at a 50% retracement or
fill you would have done well if you had waited for a full retracement it may
never have happened it also seems that we can increase the probability of
success by only taking long positions for morning gap downs as I discussed
before and refraining from taking short positions for morning gap ups in other
words only by the dips don’t try to short the morning gap ups
and you can increase you increase your probability of success this makes sense
since the stock market tends to have an upward bias have you ever noticed that
that a lot of times the the morning dips come back up a lot of the time because
the stock yeah it’s a bull market we’re in right now and so the stock market
does tend to go up over time however be aware that you will have fewer trading
opportunities if you only trade gap downs so if you choose only to go long
and not too short then you’re going to have going to have fewer fewer trading
opportunities so be aware of that here’s some more research that I located
approximately half of all large opening gaps with large being defined as more
than 40% of the previous day’s range and so you would have to check the previous
day’s high and low all right so approximately half of large opening
gaps don’t fill during that coming days action while 80 to 90% of small opening
gaps with small being defined as less less than 40% of the previous day’s
range will fill during the coming days action and the source of this I found is
Brett Steen Barger and there’s the source of that all right so you know
there’s a conclusion to be drawn here is that you’re probably better off only
focusing on the small opening gaps which have a much better probability of
filling than large opening gaps in a study lasting 962 trading days it
was found that SP why closed its opening gap on 696 of those days or about 70% of
the time when the opening gap or down when the opening gap up or gap down was
greater than point 35 percent in other words a a large larger gap the gap was
filled only on 97 of those days which is less than half the time when the opening
gap up or down was less than point 35 percent in other words a small gap the
gap was filled on 599 of those days which was about 80 percent of the time
and that source was Bret Steinberger again
and there’s the source so once again you’re better off focusing on small
opening gaps you’ll have a much higher probability of success
statistically according to that research and even over longer time frames even if
you’re not a day trader you know even over longer time frames of 30 to 60 days
it still seems that large opening gaps don’t fill very very reliably tasty
trades research found that large gaps meaning more than one standard deviation
in size filled less than 20 20 % of the time
while very large gaps very large gaps more than 1.1 and a half standard
deviations in size filled less than 16 percent of the time and they actually
gave it not just the rest of the day but thirty to sixty days and that source is
here it’s a it’s a tasty trade video there so what’s the conclusion well if
you’re going to fade opening gaps as a days as a day trading strategy first of
all truly treat it as a day trading strategy close out all of your positions
before the end of the trading day and use stop-loss orders to limit your
potential losses know ahead of time whether you’re going to wait for a
partial 50% fill or a full 100% fill to take profits personally I don’t mind
taking the smaller 50% profit because that will increase the chances of
success don’t try to fade large opening gaps and
we can define a large gap as being more more than 40% of the previous day’s
range and so check the high and the low of yesterday’s price action in the stock
find the range and then you know you can calculate 40% of that anything more than
that could be defined as a large gap and you might not want to try to fade that
gap only go for the smaller ones only trade stocks and ETFs with plenty of
volume and liquidity that’s super important you don’t want to have trouble
with the bid and ask spread that kind of thing and finally because of the stock
market’s upward bias especially in that bull market that we’re in right now I
prefer to concentrate on buying the morning dip with a long position rather
than trying to short a morning gap up however shorting gap ups is a viable
strategy for people who want more opportunities to trade
okay so I hope this was helpful thank you so much for watching please like
this video on YouTube leave a comment and subscribe to my youtube channel so
you can receive the latest updates on all of my financial educational videos
and if you have questions or need help or you want help putting together a
trading or investing plan because you really need to have one you can email me
at any time my name is David Modell and you can email me at David Modell at
gmail.com thank you so much for watching and listening and I’ll talk to you again
soon

100 thoughts on “Morning Gap Strategy: Day trade opening gaps. // Trading the open, stocks & options tips strategies

  1. I'm new to this topic, but the general advice is to wait an hour to see what the gap response will be. Is that right? Great video BTW, very informative.

  2. Thanks Dave. This information really filled in a lot of the blanks in my knowledge being a newly as it were. Again Thanks

  3. great video but i have one question: sometimes stocks which are very liquid seem to get less liquid as the day goes on. My problem is that I won't get filled. Do you have some advice?

  4. great info! thanks! if anyone knows good cryptocurrency training open markets please recommend! thanks!

  5. Hi . thanks for very informative video. In both the examples you shown of gap up and down, price surpassed the first supposed to be stop loss. so how you put stop loss in such cases?

  6. Hello David. This is actually some really useful information that I haven't been able to find anywhere else. It's actually super useful! One thing I'm wondering here is, when you trade a gap with these methods, do you take any catalyst into consideration?(positive or negative news, mergers, FDA approvals/trial fails). I know some catalysts make the stock act a bit different than a non-catalyst movement.

  7. Thank you. I enjoyed your video and did a little research on my own. Result- this video gets Five Stars. Additionally it is well illustrated and narrated.

  8. Beyond just the value of the information given in this video, my favorite thing was the way in which the information was presented. Eloquently spoken, dispersed at the right pace, clear, concise, well-enunciated….. Five stars David Moadel. You have a new subscriber ๐Ÿ™‚

  9. Thanks this very informative video, could you also kindly tell me which broker offers these stocks? preferably those that also have a mt4 trading platform for trading them.

  10. Hi, great info! How do you calculate the range of the priors days candles high and low to figure out the percentage for the gap fill.

  11. David you just save me a bunch of time from researching Scott Andrew gap studies and statistics. There so much to learn about trading. Appreciate your summarized Gap studies video. Short and to the point. Love your style of teaching. I am your new student!!! LOL

  12. nice strategy. Just one question: where would you put your stop-loss. Well I personally would not put any stop loss and close the position EOD ? Do you agree?

  13. Hi, thank you for the video, how do we know when the stock will not fill before the end of the day and set the stop loss?
    Thank you

  14. i did this today for the first time and made 300.00 on only holding 200 shares on macy's ..i feel confident in this strategy…but the thing is ..how do i find these morning gaps ,i only found it because someone mentioned it in a chat room

  15. …very professional presentation…still can't believe you did not try to sell any bs…thank you for your effort…all the best…

  16. David, do you feel like this information still applies in the current market conditions?

    Thanks for the amazing information in this video. Very well done. For a newbie like me, I could really understand what you were saying and it made the concept easy for me to grasp.

  17. I watched this video a few weeks back and thought it was interesting. I remembered it today 4/4/18 as I relected on my losses by trying to continue the trade towards the gap on the spy.

  18. Did not trade today. Went fishing. This strategy would have work really well today on NFLX and BABA today!

  19. I set my scanner to focus on the smaller gap ups with a 0.75% price change – 3% price change and seeing a lot of the gaps filled in this range. However, it was a red day for markets, so that could have been a factor… Maybe focus on gap ups on red market days, and gap downs on green market days. Not really sure, but I'm going to keep looking into this. Noticed some of the best risk/reward setups were on gap ups came after a double top forming around 10:30–12:30

  20. I have been playing around with this strategy with some success. I am looking for stocks that gap down on good news. ie good earnings. I see this fairly often. I wait for confirmation that the price is beginning to go back the other direction usually 15 minutes or so after the open. Less trades but much higher rate of success. Grew my acct by 10 % on one trade i am still holding from 2 weeks ago.

  21. hi david thank you for the video its really informative.
    how do you compute where is your stop loss for this trading? greatly appreciated

  22. This video was exactly what I was seeking. And it's rare presenters give source of their research. Thanks, David!

  23. One thing about those large gaps that I found is if they gap beyond the Bollinger bands, they tend to retrace back to the BB.ย  This is especially true if you change the BB to 3 SD.

  24. Thank you David Moadel!!! I have missed many Open Gap Setups as of the past few months because I Day Trade mostly. There was not much going on today, but I saw NFLX was gapping and has been up for the last few days. Long story short I traded NFLX long with OTM options at retest of 2 min 100 SMA and scaled out of 4 contracts on the way up to near the high of day. I tried to take it long again from the daily 50 SMA and was up again, but price action took back most of the profits. Then all of a sudden I reconginzed that NFLX did not go to higher high and I should look for a possible Gap Fill going back to the red to green line was 12 points near high of day. So I could risk 1-2 points to make 12 points. I looked for NFLX to make a lower high around $373.00. I got stopped out at the break of $373.00, but stayed focused and watched. It looked weak back below $373.00 so I shorted again and rode it down to 363.00. I did not have the guts to hold for $360.00 nor was I mentally prepared to take it back long up to 365.00. Anyway, I am going to make a video about this trade and put your link in there again. Thanks again for all you do you have made a difference in my life.

  25. Great Ideas mate, I am learning intraday trading and you guys are real teachers for us. Sharing knowledge is something I really admire. Thanks a lot for a wonderful information.

  26. So easy to understand. From one teacher to another, you are an excellent teacher, David. I would be a fool not to subscribe ๐Ÿ™‚

  27. Thank you for taking the time to create the video, making it so clear and precise, and sharing references where you got the information.

    Literally, no kidding, I just took notes a couple of hours ago to either do my own statistical analysis or research the success rate when trading at the open of the market, depending on where it closed and what it does off market.

    (to be completely honest, I've been avoiding all your videos because I'm not a fan of the females covers to lure young straight guys in. Although this was great info, I may continue to not future videos.)

  28. I was intrigued by the results claimed at 4:30 and I decided to check for myself. I took over 7300 US stocks and daily historical data from year 2000 and split the analysis in gap sizes (5 to 10%, 10 to 20%, …, 90 to 100%). I filtered out the stocks below 40 cents and the stocks with low volume on the day of the gap (open price times volume to be above $50000). I also split the results by day of week. I also considered success if a gap up is faded 80% (i.e. if a stock gaps up $1 and it then drops $0.80 by the close, that is success). For gap ups between 10 to 20%, the most successful day was Tuesday with a success ratio of 46.1%. When I added the success ratios of all gaps from 10 to 60%, I got very close to 160%, irrespective of the day of the week. So, I have not found that is better to trade gap-ups on a Friday than on a Monday (they are all equally bad ๐Ÿ™‚ ). If a stock gaps up 40% and then it closes 10% down from the open, a trader would still make 10% profit, even if the gap fade failed. If anybody wants to crosscheck the results for just a few stocks and smaller history, please let me know.

  29. As intra-day trader, this video is completely of Bullshit, the same as the candlestick myth.
    A large gap opening from yesterday's close represent s extreme behavior and often result in a trend day in either direction. The only thing that matters is how the market responds to this relatively extreme behavior, accept or reject it. Always assume Gap up =1 huge bull bar, GAP DOWN =1 huge bear bar.
    Timing (Trending, Trade Range, Reversal)is key of gap.

  30. About the study at 8:40. I checked the SPY from 1 Jan 2000 until 30 Nov 2018 and I found that there were 1005 small gap-ups (between 0.10% and 0.35%) and 73.93% of them faded completely. There were 1042 gap-ups above 0.35% and 50.77% faded completely. I put a limit to the minimum size of gaps because if a gap is very small, it would still get counted and that will affect the result. But fading very small gaps would be of no use to anybody because of the trading fees which would eat away all profit. I did not calculate what the fees would be anyway. I suspect that my results for large gaps are slightly higher compared to the study because since 2007 the volatility of the SPY increased.

  31. Very nice video! What timeframe do u use to enter a trade after opening? Do you wait till after the first 30 min to determine high and lows for that opening range, and trade where next candles open? trying to understand the proces of when to enter a trade ๐Ÿ™‚ Appreciate the work!

  32. Refreshing to see referencing! Do you have a systematic method for determining stop loss levels, in your gap trading? Thanks.

  33. That's exactly how I short the morning gaps. I look to see what's over extended and try to "guesamate" where it's gonna go back down and short from there. Like you say get between 50 to 100 percent back in returns. Love it! Lol

  34. Great video! Iโ€™ve been trading with vwap lately and am wondering if it could be implemented in this strategy. Say on a gap down the price initially drops even further. But when the price closes above vwap you go long with stop loss set just below that dayโ€™s low. Now you have a defined risk. Now you could follow the price with a trailing stop and set to break even when your volume stop gets to the entry price. I donโ€™t have the means of back testing this now but it could be a nice m.o.

  35. I've been reviewing charts and have tested this strategy with On Demand (TD Ameritrade). Impressive results so far. I've been testing using put and call options. I've had great results with both puts and calls. Like David said, this isn't 100% however the way I see it, 70% success can easily make you very wealthy.
    @ David, from my research, I'm seeing most of the success using this strategy is completed under two hours of each trading day (which is great considering it is not neccessary to stare at a damn screen all day). Volitility drops off significantly after the first two hours of most trading so large swings are less likely to occur. Great info. I've been playing with this for two weeks now and it seems too good to be true?

    Advice to all: Get a TD Ameritrade account, review charts and practice with the On Demand feature (which is the golden grail for practicing strategies such as this).

  36. Another great video David. I have been binge watching today. Who needs Netflix when I get an education watching your videos? ๐Ÿ™Œ thanks again.

  37. Gap down. Triggered by a only a hammer bullish candle But you must wait until 11am not sooner! if it does not have a green hammer candle do not do anything.!!!Two candle indicators the 10 am and the 11am will tell you what to do.

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