Many active traders regard the futures markets as unsuitable largely due to an assumption that the endeavor requires massive amounts of time and energy. It is true that effective full-time trading DOES require a serious commitment. But an initial introduction does NOT require the participant be "chained" to a computer screen all day. Effective trading can, and for many successful traders, does consist of employing only one or two very high probability setups that regularly occur during specific time periods of the day. These are traders who have done their research, they fully understand the odds behind their methodology, and they execute their trades in a very disciplined fashion. The purpose of this article is to explore just one high probability setup that normally occurs within one specific time period of the trading day - that of the opening gap.
An opening gap occurs when the market begins the trading day at a price other than where it closed at the end of the previous session, resulting in a "gap" in price when viewed on an intraday chart. If this discrepancy is unusually large, it is likely that new information has entered the marketplace, and price activity will tend to trend even further in the gap direction. If the difference between closing and opening price levels falls within a more reasonable range, there will be a tendency for the market to trade back into the gap area. The strength of this tendency is indirectly proportional to the magnitude of the gap. The narrower the gap, the stronger the tendency. Very small gaps are not even tradable. Very large gaps are less likely to close, and contain the potential to quickly move even further away from the gap level, marking the beginning of a strong trend move. These kinds of gaps are referred to as "Breakaway". On the other hand, the kind of gaps that have a higher probability of closure, and the sort that we are most interested in for the purposes of this article, are referred to as "Common" gaps.
An opening gap occurs when the market begins the trading day at a price other than where it closed at the end of the previous session, resulting in a "gap" in price when viewed on an intraday chart. If this discrepancy is unusually large, it is likely that new information has entered the marketplace, and price activity will tend to trend even further in the gap direction. If the difference between closing and opening price levels falls within a more reasonable range, there will be a tendency for the market to trade back into the gap area. The strength of this tendency is indirectly proportional to the magnitude of the gap. The narrower the gap, the stronger the tendency. Very small gaps are not even tradable. Very large gaps are less likely to close, and contain the potential to quickly move even further away from the gap level, marking the beginning of a strong trend move. These kinds of gaps are referred to as "Breakaway". On the other hand, the kind of gaps that have a higher probability of closure, and the sort that we are most interested in for the purposes of this article, are referred to as "Common" gaps.