Emini Day Trading – combining gap strategies with opening range analysis

A large opening gap should tip the trader off that the first two hours of the day might be unusually volatile and provide excellent trading opportunities.  The question for the trader is:  Will the momentum continue in the direction of the gap, or will it fill?  Getting this correct can spell large profits for the nimble trader.    In this article we are going to examine how the first 15 to 20 minutes of the day after a gap can a be used to set up low risk, high potential reward trades.   This article is an extension of our previous article, “Trading strategies that work:  Morning momentum short squeeze in the emini (es) contract“.
After a large price gap, the first point of reference is of course the opening price.  What should the trader look for?  What we want to determine is if the opening price is quickly rejected, or if it becomes a focal point of two way trade.  What I mean by this is, does price open and then immediately begin moving in one direction, or does price “criss-cross” back and forth over the opening range?   One observation we have made is that if the opening price becomes an area of two way trade, it is much more likely that the first breakout from the range will fail.  In fact, when two way trade occurs in the first 20 minutes, it is not that uncommon to see a more extended trading range for the duration of the morning session.  The best situation for a morning trade (regardless of if it is movement to fill a large gap, or momentum in the direction of the gap)  is to see that price stays almost completely on one side of the open, and is not able to retest or violate the opening price within the first 15-20 minutes of the day.  In fact, (for a long trade) the opening price should be at or very near the low tick of the day session (short sale trade reversed).
Once these conditions have been met, the trader should look to trade in the direction that price has moved in the first 15-20 minutes of the day.    The stop-loss can be a point or so below the opening price of the day session, as if we are correct in our analysis, price should not venture below that level.  The ideal situation is to then hold the trade for the duration of the morning session.   Only if our end-of-day analysis  suggests that a swing trade is warranted should this type of trade be held for the remainder of the day.
If you have read many of our other articles, you already know that we are  big on pre-planning trades and setting entry orders well in advance of execution.   With this strategy, this approach is not completely possible, as it requires analysis of the opening range before taking a trade.  However, the trader still needs to be 100% clear on what they are looking for and how they will enter the trade to avoid confusion or hesitation.  The trader can’t worry about being perfect.   It is important to keep in mind that the best trades will yield 10, even 15 points, while losses should be kept significantly below this level on any one trade.   In fact, the size of profits can really be surprising, so if it appears this trade has set up, don’t be too eager to take profits or too stressed out about taking a loss.  One good score can make up for a number of smaller losses or errors.

Leave A Reply (2 comments so far)

  • http://www.facebook.com/profile.php?id=100003405427024 Lawrence

    Thanks so much for writing all of the excellent information! Looking forward to checking out more posts!

  • http://twitter.com/AlphaOptionsNow Mike

    Very interesting article. Since this was written, have you conducted any statistical research on patterns of price after gaps fill? If there exist consistent patterns it might be possible to fade the fill or look for continuation beyond the fill, etc.

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