The open is a very complex set of topics and gap opens are an important source of information about the day's price action. Occasionally, the market opens very near to the close of the prior day (less than one average bar). This usually can be traded as if there was no gap and the open is simply continuation of the prior day's price action. Usually, the open almost always is a few bar lengths away from the close of the prior day. This is a small gap and usually this acts like a breakout or a trendline break. Usually, the market attempts to close small gaps giving either a pullback from the gap breakout or re-test after the gap trendline break. Sometimes small gaps will extend before closing and this will lead to a protracted trend after reversal. When a small gap extends, you usually have no idea how far it will go but you always know that the reversal will test the close of the prior day.
Gaps that give an open within the body of the prior day, especially mid-body are suspect. No matter which way they trend, they are likely to reverse sometime within the day.
In other words, most days are likely to trend trying to close the gap. Naturally, if it tries to close the gap in two or three attempts and fails, the market will usually give a large trend in the opposite direction. Keeping the above in mind is very important to determine 1Rev correctly.
The last case is the large gap (about a day's range). A large gap can lead to a large trend if it tries to close the gap. If it tries to extend the gap, it often behaves like a spike and channel with the gap as a spike. This often means its a soft-trend day. A large gap down can give a hard trend if it tries to widen the gap.
However, a large gap simply gives a trading range, which can lead to a gap closure late in the day (as in today's chart). A good metric for the trendiness of a large gap is the first bar, which if its a average sized trend bar is likely to lead to a large trend day. A doji or other poor bar such as today's b1 usually indicates a poor AM trend.
Determining the likely primary direction of the day improves your chances of a successful 1Rev and 1PB entry, which in turn allows you to swing for larger number of points and increases your profitability.
Hi Cad, bars 34, 62 and 74 were outside bars. Do you trade them only as 2BR?
ReplyDeleteIf you notice, that your entry bar turns out to be a outside bar - do you cancel your order?
TD, at the ends of the range, small bars can be forgiven for being outside bars. I would not cancel just because my entry bar was an outside bar if my reasons for entering the trade are otherwise sound.
ReplyDeleteHi Cad, I was thinking about this sentence:"a large gap simply gives a trading range, which can lead to a gap closure late in the day (as in today's chart)". Do you think it is better to classify today as a failed spike and channel day rather than a trading range day (because the late trend in the afternoon won't fit well with a trading range scenario)? It appears to me that after 3 attempts to continue the move higher as in a channel fails at candles 7, 19 and 57 market then gives a large trend in the opposite direction with bar 58 being 1Rev and bar 61 being 1pb.
ReplyDelete" A doji or other poor bar such as today's b1 usually indicates a poor AM trend."
ReplyDeleteMay i ask what is an AM trend?