It has been a challenge lately to find stocks that will settle down after a big early run and start an ABCD setup for a later move. It seems like they make a big move up, and then just keep going.
The gapper play is simple and is one of my favorites. It has the potential for larger gains. It starts with me identifying the stocks that have gapped up prior to the market open. I have a filter that I run on Equityfeed that I will run throughout the 1st part of the day, however at the open I only concentrate on the ones that I have identified during pre-market trading. The parameters for this filter are: last price >=1, last price <=20, today's trades >=50, today's volume >=50,000, % change >=5%, markets NASDAQ, NYSE, AMEX. This will filter out a lot of noise versus scanning market view. I recently lowered the price filter from $2 to $1 because I found a lot of potential trades I was missing between $1 and $2. I also raised the change in volume change to >=5 versus 3. The higher the change %, the larger potential move the ticker can have. I will continue to back-test my filter settings to see if I need to make adjustments.
Once a ticker hits my screen, I begin some quick technical analysis. I plug it into my charts on TOS and take a look at the daily chart to see if it is setting up for any type of daily chart breakout over multiple time frames. I also check the average daily range. I can quickly find all of the technical indicators I need at Finviz.com. If it is very low then I wouldn't expect it to trade with enough volume so it doesn't make my list. The daily chart technicals will also determine how I plan to trade the ticker. I will try and give examples of each if I can find the charts. If it looks like a ticker I am interested in I add it to my on-watch 8 chart montage. I will only watch a max of 8 tickers at a time during the trading day. The gapper charts are initially set for 5 minute candles.
After the first 15 minutes of the market is open, or after the first three 5 minute candles are printed, I will draw a green trend line across to show the high and a red trend line to show the low of the first 15 minutes. Then I switch to one minute candles and the two stocks that are closest to crossing the green trend line will go on my main screen. My main trading screen has 2 charts with Level 2 and Time and Sales for each. Sometimes I have an immediate trade. If I do not and it looks like I have a couple of minutes I will start building alerts in my TOS mobile platform to let me know when a possible trade is near on my phone. I try to set alerts slightly ahead of a breakout point so that I have enough time to wrap up what I'm doing and get to my computer. I have a 15 minute break that starts at 9:45 so it works out perfectly. If I am in an immediate trade then my break miraculously extends to 20 or 30 minutes! Now when I start shorting stocks I will use the red trend line to tell me when I need to possibly short it. There are times when the stock will trade within those lines all day and offer no setup.
Once I'm in the trade I will use the price action to guide me. I always have a goal for the stock to reach but if it ramps past it and it's still strong, I will let it continue, or at least that is my plan. If you have followed my trades you will see that I have a problem following my plan. I usually take my goal and run. I need to raise my stop to the goal I had once it moves past that level so at a minimum I will get my target profits. There are times where this initial move is the beginning of an ABCD setup for a trade that I may take later in the day.
OK. Now for some charts. This is GENE, which hit my gap screen during premarket. If you look at the daily chart before the breakout day, you'll see that the price action had picked up the week prior, but with no volume. Ordinarily I would not be interested but the ticker had already traded twice it's average daily volume from the last two weeks so I knew something was up and it needed to be on watch. Then I look at twitter and it's lit up with GENE, but with 80% of people talking shot selling it. I actually consider trolling social media technical research. It's called croudsourcing. So not only was this a 52 week breakout, but a potential short squeeze long as well. I almost pissed myself with a setup like this. Needless to say I added this ticker to my on-watch chart montage.
Next I waited for the first three 5 minute candles to print so I can draw my high (buy) and low (hard stop) trend lines. Once I did that I saw how close it was to moving above my buy line so I immediately transferred it over to my main trading screen. Below is the 5 minute chart. I made a fatal mistake when I transferred the chart. I did not transfer the low or stop line. I drew it too tight and it actually came back to bite me. I anticipated the move above the buy line and entered the trade. However, when it pulled back it it my hard stop which wasn't correct and it stopped me out for a loss. This totally screwed my mind up.
Now this is the 1 minute chart I trade on. I did enter in the trade again on the next move toward my buy line but I went in small and exited early because I wanted to erase my early loss. Another rookie mistake. My stop should have been moved up to my buy line at this point and I should have stayed in the trade. It never came back to the buy line or gave me any indication to get out.
Now my 3rd entry was anticipating the 3 break. I did a lot better job with patience and made a great trade. The sad thing is if I had traded this correctly I would have made twice as much. This is one example of how a gap trade setup works. Just don't make the mistake I made.
Here is another example. I did trade this but I will show the clean charts first, then I'll show you how I completely botched this setup again and missed out on some serious profits
This ticker hit my screener pre-market and when I looked at the daily chart I started licking my lips. Not only did we have a ticker breaking out over a 45 day grind, there is a potential gap fill with incredible range. It had a big gap down back in December and it kind of hung around the 6 to 6.50 range. This ticker gapped up over the previous resistance during that grind. It also had great volume pre-market. However, this one did not have the same chatter. Everyone still seemed to be focused on GENE. I couldn't wait till the market opened
Here is the 5 minute chart with the buy and stop lines drawn using the first 3 candles. This set up exactly like I expected it to. It took off and never really looked back.
On the one minute chart you can immediately see that the ticker was strong and a good candidate to get in before the buy line anticipating the move above it. The plan for me was to hold until I had a sell signal. It would have been around the 11:00 mark. The next good entry would have been around the 1:45 to 2:00 mark and exit after 2:30 or so. Ok, next youll see how I traded it and completely botched it up. I made money but I know I only made 1/3 of what I could have made.
Here it is. I need psychological help because only a sick trader would chop a trade up like this. Do not do this. Trust the plan and the setup. It works and if you manage it right and keep moving your stop up to protect profits the risk/reward is perfect for a new trader. I will definitely look for this ticker to gap up again on Monday. Hopefully it will give me another chance
Here is an example of a trade that did not set up. Had a huge gap up over prior 90 day resistance on the daily chart. I liked the technicals so I put it on my on watch montage.
After the first three 5 minute candles I established my buy and stop trend lines. As you can see it started a down trend and barely made it back over the stop line late in the day. There was never a buy signal established for a long.
The beautiful thing about this setup is that you can trade it long or short. As in the previous chart, you could have shorted it when the stop line didn't hold for a potential .50 gain. For me my 1000 share position would have brought $500. I have seen other charts drop $1 to $2 during intraday after a gap up pre-market. I will most likely take a few of these short in the beginning to get a feel
The last set of charts shows why you always wait for the setup to come. If you look at the daily chart you'll see that earnings came out the day before so It is most likely up on earnings. And, it practically opened at a 52 week high. It had great volume so it's definitely was a ticker I was interested in. Everything looked so good you would be tempted to long it at open.
This is the 5 minute chart after I added my lines
If you didn't wait for the 15 minutes for the first 3 candles to set up and went off of the 1 minute chart at the open, you would have been faked out. As fast as this stock dropped you would have been grabbing the oh shit handle. Decent short after the stop line broke though.