How to deal with gaps

[mEmmerrr]

So,

How do you end of day data traders deal with morning gaps?
So often I sit there planning a trade for the next day, lining up entry and stops, and then the market gaps above (for a long) or below (for a short), and I dont know what to do with it.

I dont want to just market at the opening price, because that will no longer with in with my risk management but so often they just keep on flying in the right direction, and I sit here thinking what could have been if I had checked for setups just before the close, but I dont want to get into the gap-playing-game, as I have been burned with massive gaps the wrong way before.

Set a limit order at the original price doesnt really seem right, because on a breakout or something it doesnt quite have the same effect of the momentum smashing on through the resistance buying it in a downswing.

What do you do?

 

[FXCode]

Experience Experience Experience.

Learn the types of gaps, breakaway\exhaustion\etc.
I know traders which trade only gaps - 1 hour per day and they are very profitable.

 

[tomorton]

I'm no day trader, preferring swing trades on FTSE100, but here are some gap patterns that I look out for to suggest entry and may be worth research and experimentation -
3-Day Unfilled Gap Reversal
Hole in the Wall Gap
Whiplash

Gaps can also useful indications of where support/resistance might occur e.g. see FTSE gap between High of 30/04 and Low of 05/05 - firstly, note this gap is not between consecutive sessions, which is the only sort of gap referred to by some writers - secondly, candlestick theory says the whole gap range, 4294 to 4217, is potential support, so don't go short until a Close has occurred below 4293. I am flat now an reluctant to go short in an uptrend but I am watching for this signal. Of course, if price re-bounds upwards from this region, this suggests support and confirms long-side bias. Even if you go short however, look out for the earlier gap between 29/04 and 01/05, this could offer further support.

 

[tomorton]

To add to the above, you will find the FTSE gaps referred to show differently or not at all on some charts, e.g. ADVFN. I am working off Sharescope data.

 

[wilkobets]

I`ve been watching this post hoping someone would post some useful info but I think its gone a bit off topic...

I too have recently starting spread betting and like to analyse the markets on the previous night before the markets open, placing orders which may trigger if the price moves to the target price the next day.

However, as the original post says, many times the price just gaps significantly above (or below in a Sell trade) the trigger price.

You have the option of buying at the current (higher than planned) price, or ignoring it because it does not fit in with your planned strategy - in which case it may take off and you lost out due to the morning gap.

My personal feelings are to ignore the stock - it didnt work out - oh well - onto the next trade...

What really annoys me though is when the price gaps up near the trigger, the spread betting firm sees the huge changes going on and increases their spread to something ridiculously big, at which point i`m entered into the trade at a price WAY over my order price... maybe i`ve got a) the wrong type of order, or b) the wrong spread betting firm...

 

[FXCode]

The Island Pattern is also very profitable.

 

[mEmmerrr]

Only just saw this has had some replies.

Not sure some of you got the question, but thanks anyhow.

I agree with wilkobets, if it has gapped above and not worked out then just leave it, the good think about stocks is that daily you have hundreds of setups to choose from, particular the 250