Opening Gap Trade – high probability strategy with large gaps

The opening gap trading strategy is a high probability trade that results from significant after hours activity creating a gap between yesterdays close and todays open.

Follow these links to read more about the opening gap strategy and our automated gap trading system.

Large gaps can present a problem to this strategy as it becomes less likely, but not impossible, that a large gap will be filled during that trading session.

Our mnGapAutotrader automated trading system, for example uses percentages of gap fill for its profit targets so a large gap is more likely to result in stops being hit rather than prfit targets being filled.

There is a solution, however that dramatically increases your odds of winning trades when opening gaps are large.

Adjusting your profit targets to lower percentages of gap fill may well result in a larger percentage of winning trades.

The beauty of trading the opening gap is that you know all the parameters before needing to place an order.

Experienced traders will understand that it is rare to know so many certainties in advance when trading.

So what do we know?

We know yesterdays closing price

We know yesterdays opening price

We therefore know the size of the opening gap.  And we know that before we have to place a trade.

mnGapAutotrader default profit targets

The default profit targets for our mnGapAutotrader system are 50%, 100% and 125% of gap fill.

Users can change those targets, of course and with a large opening gap it is sensible to do so.
How about halving them to 25%, 50% and say 75% of gap fill.  There is an extremely high probability of hitting 25% gap fill, even if the rest of your lots get stopped out.

This turns a losing day into a not so bad day as you have at least made some profit to counteract the stops being hit in a three lot trade.

The Nasdaq futures (NQ 12-09) trade today

The higher than expected USA GDP results created a 10 point opening gap in the Nasdaq futures.  This large gap will be challenging to fill during trading the session,  and the mngapAutotrader was stopped out, unsurprisingly.

Click to enlarge image

This image shows, though, that setting an initial target of 25% gap fill would have resulted in that target being filled so even though the other two contracts,in a three lot, would have been stopped out, the first target profit would have softened the blow of a failed trade.

By the way, the times show on the chart are UK times (currently EST – 4 hours)

This is one of the advantages of trading the opening gap.  You know the size of the gap in advance and can adjust your profit targets accordingly.

Creating this dynamic profit strategy around gap size reduces the sizes of  inevitable losses through stops being hit, and results in greater profitability over time, which traders know is one of the keys to trading success.