Swing and Day Trading: Evolution of a Trader

CHAPTER 9

Opening Gap Setup

The first part of this chapter takes a systematic approach to building a trading setup for opening gaps. What I discovered during research is that the opening gap is profitable, but not by much. When you are right, you can make 50 cents to 75 cents a share. That may not sound like much, but multiply that by 1,000 shares and it means $500 to $750 for each day trade. Annualized, that is between $125,000 and $200,000. You can make that kind of money after about three minutes of screen time, watching the charts. Wait for the entry signal and place another order to sell at the close with a stop in place, too. Then spend the day golfing, fishing, or in a glider, pretending you are a bird.

As glowing as that sounds, winning is just half the picture. Losses average about 20 cents a share, which is what I consider a maximum for a day trade. That still leaves a payoff ratio of up to 5 to 1, depending on the setup. Unfortunately, you will be stopped out about 70 percent of the time, which is not fun. Still, the numbers say that this setup is profitable. Perhaps you can find ways to improve it, such as using other types of market indicators to boost performance or season it with experience.

After that, I review three other opening gap setups that traders use, but my tests show that the skill of the trader, not the setup, is what leads to profits. How do you test experience? The answer reminds me of the time when our knowledge of aerodynamics suggested that bumblebees ...