Starting on Friday, May 1st, I will be trading again with real money….may I make Gordon Gecko look like a sucker!
Opening Range Gapper Momentum Strategy
by Charlie G.
(Feel free to borrow but please attribute me as the author when using significant passages).
I will be day trading stocks with the retail proprietary firm, Cy Group, which allows me to bypass the limits of the SEC Pattern Day Trading rule and provides access to up to $100K daily trading power without profit sharing. I bear 100% of all losses from trading, taken from a $5,000 deposit submitted to the firm. Expenses include $66 in monthly data fees, and average commissions of $3 for round-trip trades of 200 shares. Trades will be executed using the Genesis Laser platform, and my primary charting software will be StrategyDesk from TD Ameritrade.
B) Risk Management Protocol
1) Prop Firm Limits: I embrace these restrictions as a new trader and have incorporated them as part of my risk management plan: 200 share positions, 4 open positions at a time, and blocked from opening new positions after $200 in losses in one day.
The following tactics will help to reduce the size of losing trades, decrease the overall number of losers (in part by converting them to break-even trades), lock-in partial profits for fast-moving stocks that reverse quickly, and will give me the cushion/confidence to let winning trades run further to increase profits.
2) Good Entries / Tight Stops: My strategy is based on price action at opening range support and resistance levels and key price thresholds; entries will be near the breakout/breaching of these levels. Stop orders to exit 100% of the position will be placed (and I will not lift them to give a losing trade more breathing room) right under/over these levels at a technical price point that if hit, will constitute a breakdown of the setup. I will not chase if I miss an ideal entry, but rather wait for a pullback/bounce-back to the trigger level, or move-on to another set-up if a slight retracement doesn’t happen.
3) 1/2 Position Profit-taking Exits: 100 shares will be exited at the most immediate price target, typically 50 cents away (depending on Average Day Range from the triggering price level) or at opening range support/resistance or other technical level (e.g. previous day high/low, long-term S/R on daily chart, etc.) A stop order will be moved to either break-even for the remaining 100 shares of the position or at other important technical price point just beyond the ½ position exit; the rest of the position will be allowed to extend to the next price target or beyond, or until reversal of the setup.
4) Moving Stop Order to Break-Even for Stalling Set-ups: If a trade only moves to 1/3 or 1/2 way to the initial price target 5 to 10 minutes after entry, and technical indicators show a possible reversal; the stop order will be moved to break-even on the trade. Also, with positions open for more than 10 minutes, when the momentum of the set up stalls and starts to consolidate / form a tight range relatively near the entry point but not close enough to the immediate price target, the stop order will be moved right outside of the newer consolidation range formed.
5) Tilt Protection Discipline: I will have the insight and self-control to stop trading for the day when – a) I am tired, stressed, or distracted and it is negatively effecting my performance; b) When I take on rapid fire back to back positions to load up in anticipation of a big market move that I believe is coming; c) Start looking at my intraday profit and loss statement and force trades to make up for loses or exit trades prematurely to preserve profits; d) When I begin flipping positions more than one time on any one given stock; and e) Any general disregard of my risk management rules or trading strategy, such as repeated chasing or making stop loss orders wider.
C) Trading Strategy
I will employ an “Opening Range Gapper Momentum Strategy” that is based on the following overall principles: 1) The fifteen-minute opening range (high and low) form the basis of short-term resistance and support, and create repeatable patterns that can be traded with consistency; 2) Stocks that gap up or down have significant and reliable momentum, volume and price action that is very compatible with the opening range framework; and 3) Simple momentum tactics (longer candles and accelerating prices) near whole number price thresholds (e.g. $13.00 or $5.50) can be utilized to trade breakouts, breakdowns, fades and bounces of the opening range high (resistance) and low (support).
1) Watchlist: Currently, I use FinViz Premium to identify gapping stocks using real-time data around five minutes after market open. My standard parameters for this screen are: 5% gap up/down, 2 times relative volume, at least .50 average day range, minimum 1 million average daily volume, and stocks priced $10 to $50. I tweak the parameters to make them more or less restrictive to reduce my watch list to approximately ten stocks. I typically run the scan at 9:35am.
2) Charts and Indicators: I primarily trade from a 3-minute candle-stick chart – this is the time-frame for identifying setups, catching momentum, and to time entries and exits. My trading software automatically places green horizontal lines at the 15-minute opening range high and low. Between setting up my watchlist and 9:45am, I manually place red horizontal lines on the charts at key whole number price thresholds near the range the stock is trading. Price action (length of candles and acceleration) at the opening range high/low (green lines) and whole number price levels (red lines) provide me 90% of the information needed to enter a trade with a particular stock. I also use the 10-minute chart to determine a more intermediate term trend, and to ascertain if the stock is trading outside the range of the previous day low and high (which can act as resistance and support in conjunction with the current opening range). I use the daily chart to see the big picture and identify any significant longer-term trends / price levels. On my main trading window, I use no other indicators beyond the candlesticks, opening range low and high lines, and whole number key price lines (this includes no moving averages or volume bars). See below for information about a secondary confirmation chart used in certain times when making a trade.
3) Typical Set-ups:
- Range Breakouts– These are stocks that gap-up and continue their upward movement, or stocks that gap-down and reverse to recover in price. The best set-ups are when the stock consolidates for awhile near the opening range high (ORH), or have a very narrow opening range before breaking out. A stock will typically retrace back once or twice to the ORH after breaking out (to test prior resistance as support), and/or may test moving up to the ORH several times before breaking through. Also, if a whole number price is within .20 or .30 cents below the ORH, and the stock is exhibiting strong green momentum, a good entry is often after it crosses that price level and keeping a close eye as it reaches ORH.
- Range Breakdowns – This setup is the inverse of the breakout but has the same dynamics. The opening range low (ORL) is the support level that is breached. Stocks that gap down continue their movement in this direction, or stocks that gap-up reverse and lose their gains.
- Top Fades – This set-up happens when ORH acts as strong resistance and appears to have a likely probability of becoming the high of day. The set-up can also occur when price makes a very exuberant break-out (tall rocket candles) that becomes over-extended, or when the stock makes lower-highs above the ORH as price stalls.
- Bottom Bounces – When opening range low (ORL) provides a solid price level for the stock to bounce off of. The set up can also happen with overextended panic selling and price recovers under the ORL but often at a whole number price level, or a very significant longer-term support area.
There are many variations of these set-ups and a stock may exhibit several of these patterns at various points during the day.
I do not take on any positions until after 9:45am. Typically the first several price moves of the day are the strongest. Entry signals are triggered on the 3-minute chart by: 1) longer candles, 2) price acceleration, and 3) higher highs or lower lows – when occurring at or near the ORH or ORL, and/or a key whole price level (like $10.00). I use limit orders to enter a trade, and wait for a pullback / bounce-back if I hesitate or miss the initial move. The ORH /ORL is even more meaningful (and often is aligned) when it is at or near a whole number price level. I typically ignore very long wicks and use the top/bottom of a candle as the ORH/ORL when a wick is extreme.
I monitor the watchlist utilizing my minimalist chart with candlesticks and the horizontal lines as mentioned earlier. My trading ideas are formulated and entry signals identified solely on the price action seen on this chart. On a second monitor, behind my daily stock watchlist, I have a supplemental chart that I use to confirm my trading idea before I enter the trade. A key to my overall strategy (and to prevent me from getting lost in the indicators and entirely missing the stock’s price action) is to spend no more a minute or two looking at this chart, before putting it behind my watchlist again and away from my trading eyes. The confirmation chart contains the following components:
- Crosshairs: The chart and crosshairs are linked to my primary monitor with the main candlestick chart and is displayed on the same 3 or 10 minute, or daily timeframe.
- Price: Displayed as a line curve based on close with 7 and 17 minute volume-weighted moving averages (VWMA).
- Volume: Colored volume bars, 65-day moving average volume and on-balance volume (OBV) indicator.
- RSI (2) and Directional Movement-ADX (7, 7).
To confirm my prospective trade entry, I quickly look for one or more of the following while simultaneously double-checking against my main candlestick chart using the linked crosshairs:
* Price above/below the 7-minute VWMA.
* Both moving averages trending up or down.
* 7 / 17 minute VWMA crossovers.
* Volume spikes above 65-day volume moving average or recent volume bars.
* Trending or reversing OBV indicator.
* RSI (2) divergence (e.g. price getting higher, but RSI making lower highs)
* Do not enter trades when RSI (2) at extreme levels; long above 95 or short below 5 – wait for a pullback or bounce-back.
* ADX trending up or down, and Directional Line strength and/or crossovers.
After a minute or two, I hide the confirmation chart and pull up the watchlist again to cover it.
Exiting a trade is determined by price action on the 3-minute candlestick chart, and for longer-lasting (over a half-hour) trend trades, on the 10-minute chart. See the risk management section for how I place stop orders and take partial profits by exiting 1/2 of 200 share positions at selected price targets. Trades are exited for the following reasons:
- Stop Order Triggered: The anticipated set-up fails or stalls and I exit for a loss (limited based on a entry close to the ideal technical level for a stop order – e.g. ORH, ORL, etc.) or at breakeven when the stocks moves a little in my favor but goes sideways for awhile.
- Price Target Achieved: Given the importance of whole dollar price thresholds in this strategy, price projections are based on a similar framework. For example, for a breakout of ORH at a price level of $22, the initial price target would likely be $22.50 or $23.00. Determining factors are: 1) Average Day Range, 2) Stock Price, 3) Breadth of Opening Range, 4) Length of Candles, and 5) Support/Resistance based on ORH / ORL, previous day high / low, or significant price levels see on daily chart. For example, a $30 stock with an ADR of $3, with a several dollar opening range and .30 cent 3 minute candles with no overhead resistance in sight will be given a full dollar before taking 1/2 position profit with the rest of left to run to $32. A lower priced stock, with a smaller ADR, and shorter candles will be only given .50 as the initial price target (1/2 share exit) with a dollar as a full price target. For a bottom bounce or top fade, the ORL or ORH may be the initial price target depending on far away the entry is from those levels. For a stock that is really showing momentum, when the second price target is hit, I will exit half of that position and let the last 1/4 run even further.
- Manual Trailing Stop: While I will wait for my price targets to be achieved, I will move my stop loss order progressively in steps as the stock moves in the intended direction. Like in the $30 ORH breakout mentioned above, I will move my stop-order to break-even or $29.98 when the stock gets to like $30.35 and then to a partial profit when it reaches $30.75, etc. These manual trailing stops are placed either at .25 or .50 cent price marks, or high/lows of recent candlesticks, and will be tighter/wider based on price action and momentum.
- Setup Reversal: Based on the same price action movements on my main candlestick chart, stocks can stall and/or reverse as evidenced by price behavior. I will exit a position when a stock begins acting in way in which I would be looking to enter the opposite side of the trade; for example, I’m currently long but I’m seeing shorting signals and bearish tendencies, then I will go to the confirmation chart and look for a reversal in the moving averages, volume, OBV, RSI and ADX. This is a discretionary trading action and needs to be based on what I’m seeing on the charts, and not on emotion.
- Flipping: Given the typical set-ups are based on breakthroughs or fades/bounces of the opening range high or low, if a trade fails and there is strong evidence that it going in the other direction (e.g. ORH fails to act as new support after a brief topping break through, and indicators like volume are showing the sellers are taking things down quickly), I will flip my position with a tight stop and ride the stock in the other direction.
A couple important pieces to my plan-
- News – I do NOT pull up any news info on the gapping stocks (up and DOWN – which I almost like better to trade the ticks that open lower) that I’m trading. I have found that the specifics of why they are gapping (earnings, FDA news, rumor, etc.) distract me from the price action and give me a bias the often negatively impacts how I trade them. I place a stop order immediately and management my positions with caution.
- Overall Market / Sector Correlation – Based on a post from Yngvai, I realized when I tracked the overall market quickly, it shook me out of good trades, either by exiting positions too soon because the market was moving in one direction (but the stock didn’t) or by scaring from getting in at all for similar reasons. I no longer closely follow futures, $TICK, $TRIN, or $VIX – I have a Think or Swim flexible grid chart open that I take a look at once or twice an hour – BUT I just take a peak on the overall picture of the day. I see if an overall market trend day (up or down) is supporting or not relevant to the patterns I’m seeing on the watchlist charts. I do the same with a choppy – range bound overall market day. This slight awareness of what’s going on may make me give a long trade on major green market trend day some room to hit a farther away price target, and on sideways days, I may tend to be more cautious with breakout plays – and be on the lookout for fades back to the range. However, I spend just very little time looking at these overall charts, and do NOT let the info confirm/finalize my trade entries or exits. I use to follow $TICK by the tick! Right now, I don’t look at all at what a sector is doing, but I see that useful for some daytrading strategies as stocks often run together.
- DISTRACTIONS: At 9:30am, I turn off Twitter, StockTwits, the IU Chatroom, Google Reader (for blog reading), the radio (NPR), my I-Phone, and all my email accounts. This has really helped me focus on my charts. I haven’t had much luck playing chatroom alerts (my issue not the quality of the info) and Tweets have the same effect as following the overall market too closely.