Now what I did next is what separated me from them. Instead of continuing to throw money at it, I took time to learn it and see if it was a fit for me. Even though I like the Gap and Go strategy, I do not have the emotional fortitude to trade those. Ross is the coolest trader I know. I am amazed everyday watching him in chat. You would never know whether he was in a winning trade or a losing trade unless he told you. That is the sign of a true trader. I knew I wasn't at his level of comfort as a trader. When I first started there wasn't a video feed and all you heard was his voice. I would get the same feeling about how calm, cool, and collected he was.
Here is what I knew. To be successful day trading, I had to find the stocks that were in play that day. If I waited to the market opened and started looking, I would feel like I was behind all day. I know this to be a fact because it happened a couple of times because of work. So I knew searching for the pre-market movers (gappers), was the way to go. I also knew that the first 5 minutes of the market open was the most volatile, however I didn't have what it took yet to be able to take advantage of it so I had to adapt the Gap and Go strategy to something that I could work with.
This is how I came up with the "15 opening range breakout". It's nothing new. The opening range strategy has been around for years. It is traded using the 1, 2, 3, 5, 10, 15, 30, 60 minute ranges. I chose the 5 because it worked around my schedule at work, my break is from 9:30 to 10:00. It just so happened to work for me.
Typically, during the open of the trading day, which, as I said before happens is the most volatile emotionally draining part of the trading session, markets absorb the overnight information and reflect this information in their price. Even though most markets are open virtually around the clock, the majority of volume and volatility does not appear during the after hours or pre-market sessions, but begins after the stock market opens each day at 9:30 EST. This is when institutional traders come into the market, buying and selling massive amounts of shares through computerized trade executions systems called program buying and program selling. The volume is so big that it can have a very strong impact on the short term movement of the stock market. These institutional buy and sell programs usually do not get executed during the pre-market session, therefore it is very difficult to truly see what impact the overnight market will have on the stock market till the stock market actually opens and begins trading during the regular day session.
I have witnessed several times in chat when the pre-market momentum is pointing in one direction with a very strong bias, only to open and move completely in the opposite direction within the first 15 to 30 minutes of the trading session, trapping those that were not as quick as Ross to take profit or cut the loss quickly. Therefore, the pre-market action can offer strong clues into the direction the market is headed but ultimately, there is no better indicator of market direction than the market itself after the first 15 to 30 minutes of the trading session. Patience does pay off. Check out these examples:
This chart is from CCLS from the day I wrote this blog. As you can see it gapped up pre-market a nice %, typically I like 4% or better, but really like the ones over $1, and it had decent pre-market volume. I check some other technicals like ATR and the float. If it looks good I put it on my watch list. This ticker was actually on my watchlist today. I didn't trade today because we are closing out our school year and I'm packing, but I would have traded this if I was at my computer. I put my watches in my chart montages and wait for the first 15 minutes to pass. The 15 minute opening range is marked by a green trend line (high), and a red trend line (low) of the first 15 minutes. I like to use a 5 minute chart for this. 1 and 2 minute charts are too noisy for me.
As you can see it faded a little at the open and then quickly recovered above the VWAP. For me that is a good sign that I will have a trade. If a ticker is starting to look good I will put in a limit order .02 above the green trend line. If the market is a little slow I will wait until a candle closes above the trend line before I enter. In either case my stop will be .05 below the green trend line. And if you are really feeling good you can enter after it pushed the VWAP with a stop a couple of cents below it. Now, because there are other traders out there trading the same strategy, I often get a pop over the green trend line, then a red doji or spinning top next, and then it makes it's move. If I get a solid red candle, I may just take it off and wait for further confirmation. My target is usually the next obvious resistance level based on the daily chart or the +2 deviation band on my VWAP study if it's far enough away. Sometimes I like to exit off of my interpretation of the price action but I try and stick to targets unless the fade back comes earlier.
But, I'm not done yet! There is usually another opportunity to trade the gapper after a pullback or consolidation. This is a throwback from my early days. It will either setup with an ABCD type pattern of it will start gearing an perking around the consolidation point building up for another move to the up side. It can also set up for a reversal or VWAP trade. In this case, it started gearing and perking and then it popped again and gave another trade opportunity, then set up for a top reversal to give even another opportunity for a trade.
This example shows why I eventually made the move to using the 5 minute opening range . Because this ticker was strong out of the gate I would be looking for a pullback to VWAP to enter or a reversal because waiting the first 15 minutes took up most of the range. The easy money on this would have been the 5 minute opening range breakout.
This is an example of a failed 15 minute ORB and why I like to tell new traders to wait for a candle to print completely above the 15 minute opening range price. If I had entered on the candle that broke the opening range high I would have been quickly stopped out on the next candle. I always need confirmation. I may miss a trade or two but more often than not, it pays to be patient.
$1,185 profit PBMD Long Stock by AverageJoeTradr
This is a trade I took on a gapper a couple of days ago that shows another way my trades can set up. This ticker actually consolidated around the 15 minute opening range high before it popped. I didn't initially take the trade above the trend line because it was so strong out of the gate and the 1st candle to print above the line was a doji so I expected a pullback. It never really pulled back and it held above the VWAP so I knew it would be a good trade. I drew another green trend line at the 2.95 mark because that was the highs of the consolidation candles for my possible entry point. I actually put an order in at 2.95 and buzzed some of my other charts and saw another setup and completely forgot about this one. Thankfully I already had my order in and I caught the trade. That quick spike up to 5.50 and pullback scared me out of the trade. Usually that means a trend change is coming but it went on to run up another point. But, the point is the 15 minute opening range is a solid, viable setup.
There are a few conditions that should be taken into consideration prior to taking a trade using this strategy:
1. Time of day - the quicker the ticker can break above the 15 minute opening range, the better the odds of the trade working out. In addition, most breakouts that occur later in the day will not have the momentum needed to sustain the volatility and direction that is needed. This can affect your risk/reward ratio.
2. Biased toward the up side - sometimes I see tickers swing back and forth between the high and the low of the opening range. Most of the time when I see this type of price action I avoid entering the trade even though all other of my parameters have been met. The price action to look for while a ticker is setting up is when it tests the high more than once or consolidates just below the high, making higher highs and higher lows in anticipation of breaking out. What I don’t like to see is a ticker that keeps bouncing back forth in a choppy trading range between the high and low trend lines.
3. Volume - I like to see volume increasing as the ticker is setting up for the breakout. However, as long as volume is only dropping off gradually but is still within the range that it was during the first 15 minutes of the open, I will still consider the trade. But if the volume is barely coming in compared to how it was during the first 15 minutes, I will most likely not place the trade. Watching the volume is not really an exact science, the more you track it with your trades, the better feel you will get.
Like any other setup it doesn't work every time and there are days when the gappers just do not run. But at least 2 days out of the week you should see some solid gappers provide trade opportunities. I do believe this strategy, when reversed, can be used to short these gappers if they go the other way. This is something I will work on over the next couple of months because when the longs aren't working, the shorts have to be!