Post-Gap Trading strategy's explanation
The post-gap trading strategy is suitable for stock-based trading assets. As the strategy suggests, we will need a gap in order to apply our trading rules. For this reason, we will use financial assets that start and end the trading day. These financial assets have morning gaps between the different trading sessions.
Strategy rules: The training session starts with a morning gap. Then, in the next 30 to 60 minutes, the trading assets will try to stabilize from the craziness caused by the market opening. The strategy suggests that we observe what happens in the first 30 to 60 minutes and open our trading position based on these events. If the stock starts with a bearish gap and then in the next 60 minutes the price fulfills the gap in bullish direction, then we will have sufficient reason to believe that the price might continue to increase. But if the price continues to decrease, then maybe it will enter a decent bearish trend. The opposite rules apply if the gap is bullish. Another feature of this day trading strategy is that we will constantly use price action rules to determine our exit points. We will use trendlines, candle patterns, chart patterns and other on-chart formations to find the best exit point for our trade. We will use the volume indicator to determine the end of the morning craziness. This will help us jump into an eventual steady trend for the day.
Stop-loss rules: A good place for your stop-loss order will be the opposite side of the gap. If you open a bullish trade, a good place for the stop-loss order will be below the lower point of the gap. But if you open a bearish trade, the stop-loss order should be above the highest point of the gap.
This is the five minute chart of AliBaba for December 21, 2018. The volume indicator is at the bottom of the chart. The trading day starts with a relatively big bullish gap. The trading volumes are high and volatility is high, as well. This is the morning craziness.
Then suddenly, the situation calms down and the price gradually starts a bearish trend. The price breaks the gap’s low which gives us an indication that the downward move might be dominant during the day. We sell on the assumption that this will be the intraday price movement. We place a stop-loss order at the opposite side of the gap.
The distance between the entry point and the stop loss order is $1.60. The price decrease continues throughout the day. We manage to follow the gradual price drop by a trend line (blue). Since we have a trend line, we can hold the trade as long as the price is below that line or until the end of the trading session. The end of the day is what comes first and we close the trade in order to keep it intraday.
The trade gets a bearish price move of $3.10, which equals to 2.31%. The stop-loss order is at 1.19%. This gives us a win-loss ratio of nearly (1.94:1).