Guidelines to follow on any day that the futures open outside of the prior day’s RTHRegular Trading Hours. In the /ES this means the price action from 9:30am EST to 4:15pm EST only. range. Only opening outside of range is a true gapThere is a lot of discussion as to what constitutes a gap. Is it measured to the prior day's close, or to the prior day's high or low. Here at ShadowTrader we believe that it is always and only to a prior day's high or low, thus creating a true gap or space on the chart between one day and the next. Thus a true gap is one that has price opening completely outside of the prior day's range (either above the high or below the low) and anything else is just a gap that has far less import. As a gap is a "reordering of thinking", only a true gap really changes the tone and creates opportunity to trade early rather than later. and puts gap rules in play.
1. Go with all gaps that don’t fill right away. This means that if early trade doesn’t start to correct the imbalance, then prices will probably move in the direction of the gap.
2. Larger gaps can often fail to fill on the first day or may fill only partially.
3. If the gap fills (meaning the prior day’s RTHRegular Trading Hours. In the /ES this means the price action from 9:30am EST to 4:15pm EST only. high is touched on a gap up or the prior day’s RTHRegular Trading Hours. In the /ES this means the price action from 9:30am EST to 4:15pm EST only. low is touched on a gap down) and value cannot get to at least overlapping, then the odds of a late day rally (on a gap up) or late day selloff (on a gap down) increase.
4. Gaps of larger than $20 in the /ES are difficult to trade and should be avoided early in the day as the market usually tends to just “digest” the overnight move and not go anywhere. In such a situation, day timeframe players should focus on individual stocks rather than futures as there will be more playable movement.
