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Looking At Today's Gap Down

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August 05, 2010 – Comments (0) | RELATED TICKERS: SPY

I've received quite a few emails and comments from folks asking about how I trade the gap (when I do) and how do I construct my trade. So I figured we could look at today's open as a case study, even though I didn't trade it this morning (we can talk about that too), what the parameters would have been had I gone through with the trade. I'll try to highlight a few of these over the next couple of weeks, as well as look at some from recent weeks too.

There are a few things to point out here...

1) Jobs report created a pretty big sell-off in the pre-market and scared me off from trading this one.

2) It is under 10 points on the S&P which I tend to only trade.

3) However, had I traded this, my stop-loss would have been the difference between yesterday's close and today's open, which is about .72 cents 1 Reward/Risk Ratio of 1:1. 

4) I've been considering of late possibly making my stop-loss half of the opening gap, which would give me a 2:1 Reward to Risk ratio, which is very good, however, it would result in more stop-outs. But if I am right 33% of the time I break-even and since 80% of all gaps tend to fill, this would probably work out in my favor - still some research for me to do on this though before implementing it.

Here is how today's gap worked...

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