In the above video I will show you a live example of a simple day trading strategy that I like to trade, called “The Opening Gap”. The video was recorded by myself today at the market open (9:30 EST or 14:30 GMT).
I don’t claim to have invented this strategy. In fact, many day traders like myself have been using this high probability strategy for years.
For the MT4 chart platform we use: Markets dotcom. For a list of our recommended chart platforms see trading tools.
Here is how the strategy is played:
1) Set up a 5-minute (or 2-minute) Chart of the Dow Jones E-mini Futures (or “Wall Street Futures”)
2) The timeframe for this trade is from 9:30 EST to 16:15 EST
3) The chart will not necessarily show you the Opening Gap, which essentially is the period (or “gap”) from yesterday’s closing price on the Dow at 16:15 EST to today’s open at 9:30 EST. Tip: What you can do is draw a horizontal line at yesterday’s close and when today’s market opens, just trade in the direction towards that horizontal line. This is the same as “filling the gap”.
4) You trade in the direction to fill the gap (or towards the horizontal line – as explained above)
5) If the open on the Dow today is lower than yesterday’s close, then we go long (buy) and if open above yesterday’s close then we go short (sell short).
6) The gap on the Dow must be a minimum of 20 points and no more than 50 points
7) Enter with a market order at the market open i.e. 9:30 EST
8) Use a stop-loss of equal the size of the gap or, if you prefer, twice the gap size (the reason why a 1:1 or an inverse risk-reward is used here is because this is a high probability strategy and I want to allow the trade to play out)
9) The target is yesterday’s close.
10) If the gap does not fill by just before 16:15 EST (the close), then exit the market for either a small gain or loss. If your stop gets hit I do not suggest re-entering the market – for me the gap trade is over for the day.
By the way, watch my new video on how you should trade the gap strategy for 2016. Plus I’ll reveal the best and worst days for trading the gap. For details, click here.
Here are some chart examples:
A Gap Down:
A Gap Up:
See the video above for a live example.
The Video’s Best Bits:
If you cannot be bothered to watch the whole video (which I recommend you should), then here are the main bits:
1) The Opening Bell and placing the trade: Scroll to 0:48 of video
2) Placing an alert to notify you of when the target is hit: Scroll to 1:40 of video
3) How the trade ended: Scroll to 4:53 of video
Is there any option about getting an INTERN with you/your company? Im not after the money so its not necessary a retribution.
It is my PASSION also. I would like to have an opportunity to work with you.
I have a Bachelor Degree in Administration and Business Management, and Im stuying 2 Masters right now, one of the is about Day Trading.
I would like to have an opportunity to get my passion into my job. And so learn from you.
Don’t blame the players, blame the game 😉
very nice presentation!
Thanks Helene – glad you liked it. Cheers!!
Hello
I have some comment on profit/loss management showed in that strategy.
When you put stop-loss order at 1.5 times of the gap and you want to earn ca. the size of the gap, then you need a system with 60% of profitable trades ONLY TO MAINTANI CURRENT LEVEL OF YOR ACCOUNT.
When you put stop-loss order at 2 times of the gap and you want to earn ca. the size of the gap, then you need a system with ca. 67% of profitable trades ONLY TO MAINTANI CURRENT LEVEL OF YOR ACCOUNT.
Personally, I prefer a ratio of 1:3 (if I risk 1 unit, I want to earn 3 units). Mabye you could elaborate more on your idea of managing losses 😉
And to conclude, I guess many people think that it is the efficiency of the system is most important, which is obviously wrong. Most important is expcted value of trades made by the system/strategy.
Regards
M.
hi 🙂 like your blog 🙂
could i see your trades? 🙂
send me it on mail 🙂
Martin – you are absolutely correct in what you say.
Yes for most strategies you can and should look for at least a 2:1 to 3:1 risk reward. BUT – this particular gap strategy I am teaching here has a high probability win ratio (over 60%). Some research has been done on the probability ratio of this strategy by other traders. As long as you are consistent, you should make it work.
As a side note, some traders like Hubert Senters like to use this strategy with a 20 point hard stop and with targets of +10, +20 and +40.
I say, Which ever you prefer with your personality.
Alessio
Great presentation, very informative. Will this work on gaps on any chart eg. currency or gold spot?
Oh and keep em comming, great work.
Thanks Dom
heyy Alessio
i like the way u share your knowledge, its just a humble thing to do in our field actually. good work btw i’m a Trader too, trades on Indian Exchanges.
For the newcomers yesterday’s EUR/USD Sunday drop would have been a nice intro!
Hi Dom – you can test it on other gaps if you wish. But I would stick with the ones on the Dow Jones futures (YM).
Thanks and regards, Al
Thanks for the video.
Can’t you let your software automatically close your trade once the market reached a predefined number? Seems like it would be a lot more comfortable to just put in the numbers and check back later and not having to sit in wait for an acoustic signal to click the button.
Cheers,
Jared
Jared – the answer is yes you can programme it to do that. very good point. Some people like the thrill of watching the trade as it happens.
Alessio,
there are many people now glued to your blog since you made your BBC hit. But you should also consider many of those start at scratch and have little background or experience. So, please don’t make it look ‘that’ easy or the rookies believe these are easy money trades.
Strategy (gap-filling here close 10805 / open 10771 = gap 34 points):
a) In my opinion a trader should consider and set a stop-loss with the entry trade already.
b) Initially you mentioned your target is half the gap (17 points or 10788), and during the second 3-minute candle you would have been filled. I assume you just had a hunch and wanted to portrait on this teaching-video this time the gap will be filled 100%, therefore you did not accept half-gap-fill, didn’t set an automated profit-taking, you just waited with an alert and closed it manually.
c) I think this is a risky strategy where you aim for (general) 50% gap (here: 17 points), but set your stop at 1.5x gap = 10721…You went long at 10774, so your loss would have been 53 points = 1:3 ratio, in fact a good ratio in trading should be 2:1 (perhaps not with gap-filling strategies), similar to Martin’s comment.
Here are further thoughts for you guys out there:
– the market can sometimes be very fast and volatile, and if playing for a opening gap, place both orders (profit taking and stop-loss) and do not watch it, get alerted and place it manually – execution might be too late after a good idea.
– Allesio, please hint to your new followers there could be also different kinds of gaps e.g. “run-away” gaps (they won’t be filled soon) or “exhaustion” gaps , not to mention “island reversal” gaps. In other words, it ain’t “that” easy to gamble on a gap every time.
– usually the real trading gap could be considered between the last day’s low (not the close) and the opening price.
All the best and good luck !
Kai – you make some very intelligent and good points.
FIrstly – I don’t trade hunches. Only a solid trading plan. Secondly, a 2:1 risk reward is acceptable with most strategies yes. But remember, every strategy requires a different stop-loss and trade management. This particular trading strategy works best by giving it lots of room otherwise you would be stopped out too early in the game.
But I take your point. Everyone should test a strategy before trying it. And no, trading is not easy. But the rules are simple. Thanks and hope to read your comments in the future too! Al
I learned a lot from this vidéo, thank you!
nice trade Alessio!!
just a FYI for the begining traders. make sure you do your back testing and test your strategys. i have spent alot of time studying gaps.
a gap of 1-3 points on S&P (DOW 10-30) WILL FILL IN FIRST 30MIN
3-7 points s&p (dow 30-70) will fill in first 1.5 hours
7-12 points on S&p (dow 70-120) last 1/2 hour of the trading day
13 points (130 dow) or more points have been proven as gap and run days and do not close that trading day. most novice traders donate money on days like this because the want to trade in the opposite direction of the gap.
I am new to day-trading, but not so much to investing in general, and yes I came after watching your awesome performance on BBC. These might be newb questions, but maybe you could answer:
1) I am wondering about the fees and capital gains taxes paid after doing all this stuff on a daily basis. Don’t they erode a lot of the profit?
2) Another thing that might be helpful for many is how to set up your own “Tradestation”. suggested equipment, guides, etc. I went to their website, and I think it’s a good place, but would love to see a blog post that shows one how to “set up shop.”
Thanks again for a fantastic blog and sharing this information! g
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Hi Alessio,
can you please list the top books on How to buy/sell stocks and on Forex market?
Thanks.
Alessio…thank you VERY much for your videos and blog…you are full of knowledge and have helped me since I am a beginner in the market. I actually heard about the E-mini a few months ago, but decided against it because it seemed too complicated. Now you inspired me to try it!
1. Do you recommend trading the E-mini futures over regular stocks? Do you trade the E-mini more than single stocks?
2. To trade the E-mini, do you have to use tradestation, or can I use an account at etrade or optionshouse? In other words, how do you get the ability to trade on the E-mini?
Thank you sir!
Good Job on the presentation there Allessio!!
Don’t you just love it when everything came together there 🙂
Just curious, how much did you make on that trade there??
Great video. Intresting strategy. Good education for me. I’ll look into it.
Could we see more examples of strategies?
I’m interested in your comment “don’t chase the money” because I think that is a common beginners fault.
Hey there, I think you did a really good thing on tv. In all my life, I have never seen someone so honest and interesting on tv to listen to. Anyway I think I have read all your posts. This strategy about taking advantage of the opening gap, looks like it just might work. Love your humble attitude.
Nice Video! Very informative and easy to understand! Keep up the good work!
Hi Alessio, I’ve been reading your blog since your interview on BBC. I’m really thankful to you for sharing and educating others. On your blog I have seen a sign-up form for trading alerts. I did sign up, but haven’t received anything thus far. Just wanted to ask whether it’s meant to be that way or maybe there is a fault and I’m not receiving the alerts by email. Thank you for your time.
Thanks for your presentations!
Actually i never Traded something on the stockmarket but im really intrested in it.
I have some Questions though.
Where is your software from? Coud i trade just with an E-Banking Account on my bank?
I saw the fees are quite expensive for a beginner who want to start Trading with small money!
Good Work!
Thank you for demonstrating a real-time strategic futures-trading session.
Great Interview on BBC, and great blog Al. If you had to reccomend a tradestation setup
(computer configuration, screens, software, etc) I would apprecaite it. Do you pay for market data such as Bloomberg or MorningStar Direct? What do you reccomend? Thanks in advance.
Nice presentation. I’m learning a lot with your recomendations.
I’ll be soon in the party. 🙂
I’ll x2 Reto’s post
Hi guys im still a beginner in this whole trading system and was wondering when you said 10YM(dow e-mini) Contracts = $50 points what those that actually mean in this video you bought at 10,774 and stopped at 10,805 which = 31 Points.. correct? and that would mean each point= $50? so 31 *50= 1550 for all 10 contracts you have??
http://www.youtube.com/watch?v=uZmPWcLQ1Mk&feature=player_embedded
NEED TO WATCH THIS!!!! BE THE CHANGE
There are plenty of details of one trader’s opening gap strategy in John Carter’s “Mastering the Trade” A good book IMHO.
I would totally agree John. One of my favourites too.
Alessio,
Thank you for this video. It was awesome seeing the trade actually happen. Can you tell me how much you made on this trade as I cannot figure this out for sure?
Matt – Thanks – One Dow contract is $5 per point. This was 10 contracts so it was $50 per point . So $50 x 30 points approx. which makes it $1500.
Thank you Alessio! and the cost for Dow contract is whatever it closes? So you paid 10,774 X 10 for it which u paid 107,740 for 10 contracts ?
OK, that makes sense. Thanks for the explanation!
This strategy seems stupid to me…seems like its just a coin toss of whether you win or lose on it. I like trades where i think i have a lot better than coin toss odds.
Hi. I agree with you – 100% +. Thank you for the information. Mike.
Patrick – on first appearances it looks like a coin toss. Actually – this is based on probabilities. The probability of the gap “filling” on stock indexes like the dow is quite high. It varies from Monday to friday (monday being the lowest and thursday the highest). There are fundamental and psychological reason why these gaps tend to fill as well.
Thanks Mike!
What about commissions? Since these daily gains are pretty small – might make $50 – is it still worth it with commissions totaling $25 for both trades?
Also, do you trade anything other than the DOW – like leveraged indices of the DOW – seems like you could make more doing that.
Very interesting Alessio. I am a landscape contractor with a need for winter employment. I want to stay home with my young family. Your Goldman sacs rules the world interview was awesome. I’ve heard that before but no one ever had the gonads to say it on air with news media. I like brave bold say it like it is people. Good for you
Thanks Colin! Cheers. Hope you find what you are looking for. Al
Thanks Alessio. Looks like a good idea to try. I’ll be giving it a go. Thanks!
Thanks David – Let me know how it goes for you. All the best. Alessio
Hi Alessio, Thanks for the video teaching, but why it must be 3 mintues chart and not a daily chart?
Can you please show me or to all who are new to this trade, another video showing Day Trade strategy with short?
Hi CsDiong – thanks for your question re gap strategy. You can use a daily chart to see the gap if you wish. I find that looking at a smaller time frame chart like 3min or 5min helps see the gap a lot better – especially if you are also trying to set your target at half the gap fill instead of a full gap fill. In regards another day-trade strategy for shorting feel free to come to the free webinar this thursday (details in your email). I also like using the squeeze indicator as a setup for shorting. Visit this link for details: leadingtrader.com/squeeze – thanks. Alessio
Hi Alessio,
thanks for the presentation. I like your honesty. The only thing that worries me with this trading strategy is that you appear to be going against the trend. If the market is heading lower and it gaps lower, you suggest going long. I would have expected the market to keep heading in that downward direction.
Thanks
Carel
Here is a gap trading strategy, but it includes breakout above prior day high/low in first 1/2 minutes of open. This is an Indian market blog but it seems to have sound logic behind it. I do not know how it work for US markets but I applied it in my trading and it worked.
Alessio, hope u make a comment on this strategy, even though it is not exactly a gap trading strategy but all gaps are included in it.
Hi,
I understand that the best days of the week to use this system are Tues, Wed and Thurs.
Are there months when this system works best and months where this system is less effective?
I ask this as I have looked at the performance of this system over the last 2 weeks of August and the system seemed to lose on Tues 21st August, Wed 22nd, Thur 23rd and Thur 30th. It only won on Tues 28th when the opening was 13092 and the previous day’s close was 13117 indicating a buy signal. There was no bet on Tues 29th as the gap was only 6 points.
Is this just a rare blip for the system or does this occur quite often?
Kind regards,
James.
Looking at the chart for the YM e-mini future I can’t see any gaps lately. This goes for all time frames, including 1min. I’m using Saxo Bank’s demo solution, any suggestions to this one?
Hey James!
Just noticed your comment. I think we’re in the same process of starting out trading gaps.
If you want to discuss strategy and so – email me at simon.rasmussen@gmail.com
the strategy works well on the s and p 500 but only look to go long if the last close is lower than previous 2 days
use the spy index
this is a cool strategy , but i would like to know about the strategy that does not depend on gap up or gap down
Hi Investor. For more strategies which don’t depend on gaps, feel free to visit my page: https://www.leadingtrader.com/tradingtools – thanks.
Can you use this strategy for day trading individual stocks too? I started day trading recently and am looking for a go-to strategy. This seems pretty simple to apply – great job at explaining it!
Hi Alessio,
I’ve learned alot watching your videos.
But I have done a little research on Gaps and there are a few people that argue the opposite saying that majority of the time these Gaps go in the opposite direction.
Are their any indicators that you use predict these or strategies you employ for when things move in the opposite direction?
Hi there, I think those sources that you mention are misleading. Not all gaps fill that is true. However, you can put the odds in your favour. For example, you can choose to only trade gaps that allow you to trade in the direction of the main trend. This means that if the major trend is UP, then only take gap downs – and if the trend is DOWN then only take gap ups. The other thing you can do as well is avoid taking gaps on low probability days like Mondays (and also options expiry fridays). Hope it helps.
Thanks for the clarification.
So check the trend on close the day for before as that should dictate the direction of the gap. Got ya.
I will watch closely for a few days before I dip my toe in the pond.