If you follow my blog, you may notice I can occasionally drift all over the place – more than a illiquid crappy penny stock in the afternoon of a major market trend day. About five years ago, I finally landed in the perfect career role for the way my brain operates. I work for myself (flexibility around when I need to perform), have multiple clients (diversification of personalities / interactions), primarily create written products (I enjoy / am above average writer), everything is deadline driven (have trouble with open ended projects without external due dates), lots of variety (subject manner / scope of projects), and there is some social benefit to my day job – grant proposal writing for nonprofits and universities.
I have done some meandering in my trading endeavors – every other day I seem to have a new plan. I think it was just last week I said I was going to paper trade pre-market movers at open, my watchlist mid morning, and ETFs into lunch. I did not do that one time this week! Though it was largely due my crazy work week which resulted in one all nighter, and because a new focus was starting to formulate in my mind.
I think it’s like when you try a new sport for the first time. Let’s take baseball (go Tigers – home opener today!) You may try pitching and various positions. You figure out you are more of an infielder than an outfielder. Eventually, because of your arm, it becomes clear that third base may be your ideal position to maximize your talents. You gain some specialized skills in this role and rack up lots of practice with the different scenarios that play out at this corner bag – throw from center on an attempted triple, sacrifice bunts, double play throws to second base, etc, all stuff that as an outfielder you don’t even think about. This can apply to trading.
BlueCollar Trader posted this link a month or so ago (ignore the myspace-like graphics). Essentially, it advocates mastering one type of set up and concentrating on that before making it more complicated and adding new variables to the mix. Looking back at my trading, I seem to have had more success with stocks that are moving in pre-market and open with a gap up or lower. I’ve started to put into practice some basic tactics that seem to have some promise. Essentially, I’m using the same principles of momentum trading (as I discussed in fusing the Muddy / Fear & Greed day trader approaches) with some of the ideas from the Trader-X lineage of traders (Am I Bald?, TraderAM, OONR7, etc.). Now, don’t worry, I won’t be using Fibonacci as I want Yngavi to continue to talk to me.
So here are the basics of what I’m calling the “Gapper-Strategy“.
- Stocks (non ETFs) with at least 1 million daily volume, the more liquidity the better.
- Currently stocks between $5 and $15, partly because of my account size as well as all my experience is trading stocks in this range. The cheaper and more illiquid stocks seem to behave differently and the classic Muddy techniques (jiggy-ness, former runners, etc.) that I haven’t quite mastered seem to be more applicable. Higher priced stocks with larger price ranges – just don’t want to add that new complexity to the mix yet.
- Pre-market movers that gap up or down. Muddy and Yngavi share lists in chat each morning, and The Kirk Report posts a list around 9:15am as well.
- Five-minute candle-stick charts with 10 SMA and 60 SMA, and volume bars underneath.
- No trading first 15 minutes.
- Based on the range created by first three bars of the morning, I draw a opening range high (ORH) and opening range low (ORL) lines on the charts.
- ORH tends to act as short-term resistance, and ORL tends to serve as short-term support.
- Essentially, I’m looking for four types of sets ups (1) ORH Breakouts, (2) ORH Fades, (3) ORL Breakdowns, and (4) ORL Bounces.
- When the opening range support and resistance levels are near whole-number price thresholds of like $10 or $7.50 – makes the price-action at that range even more critical.
- Basically, the entry trigger is a taller candle (green or red) with a volume spike at the top or bottom of the opening ranges.
- Currently, I’m still using my existing exit rules as described in the past.
I’ve started to back test these set ups and have 15 trades logged into an excel worksheet so far. I want to plug in hundreds more. Questions do remain, some of them but not all of them – are below ~
- Obviously, the big one – under what conditions does the opening range contain the stocks and under what situations do they break out?
- How many times and in what manner will the stock price test the support/resistance levels – and how to identify from this action the probability of where the stock is heading?
- How and when to flip your position in the other direction – when a stock breaks a little past resistance but doesn’t continue or even makes a nice move up but tops, it often then will fail hard, or vice-versa?
- How do the gappers react on market trend days versus range days, and during particular times during the day (my thesis is that breakouts/down set-ups happen more during trend days, and at the open/end of market hours, and that fade/bounce set-ups are more frequent on range days and over the mid-day/lunch lull)?
This is a start and what I plan to focus on during the second half of my six-week sim trading training period. So instead of posting a watchlist each night, I’m going to use that time to do more back testing on historical charts. And during the day, I will be exclusively focusing and testing this strategy on stocks that gap up or down.