≈ How to trigger after a price gap. ≈
Stock futures were up over the weekend, delivering an up gap for many indexes this morning. Price gaps like this happen all the time. Some are large; some are small. Let’s talk about how to deal with them when trying to trigger a bullish trade.
First, if you preset your entry before the market opened (buy stop or buy stop limit for stock or contingent order for options), then you could just let it ride and get filled at whatever price is available when the market opens.
Second, if you either didn’t preset your order or want to modify it to adjust for the higher prices after the gap, then consider the 5-minute rule.
Here’s the rule: Let the stock trade for five minutes after the open. Then mark the high of the 5-minute candle. That’s your new trigger. If prices penetrate the high, then it gives you confirmation that this could be a breakaway gap or that prices are at least continuing in the direction of the gap.
One of the perks of the rule is that it prevents you from buying right at what could be the high of the day. It’s not uncommon for prices to set the high level of the day right at the open if buyers were a little too optimistic in overnight trading. Today’s chart of the day shows an example using this morning’s open in IWM.
Chart of the Day: IWM Gap
This morning’s gap higher was quickly rejected, bringing short-term pain to those who chased the open. Mark the high at $240.76. That’s the new trigger point for bull trades on IWM.
Video of the day: Trading Concept Check: O.H.L.C.R Data (Open, High, Low, Close & Range)
Watch this quick video to help you make sure you understand the data that goes into the charts that traders use to help them make profitable decisions.
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