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Gap Up Sell Signal

ВрOpening price gaps to the upside provide opportunities to sell the market short for a day trade. The procedure here is the inverse of the lower opening price gap which is used for buyВэing. See Figure 6-4 and the rules below for specifics:

1. In the event of an opening price gap up, the first condition for a posВэsible sell signal will be established.

2. If a higher opening price gap occurs, then you will place an order to sell once the market has come back down and penetrated the previВэous day's high by a given number of ticks.

3. Such an order must be given as a sell stop order or a sell stop limit order.

4. You will use a stop loss either at a predetermined dollar amount or several ticks above the day's low once your order has been filled.

5. Of the two stop methods, I prefer the money management dollar stop loss because, in many cases, the day's price range will have been too narrow to permit a reasonable stop loss to be placed.

Assume the following situation: T-bond futures establish a trading range yesterday of 10201 as the low, 10214 as the high, 10203 as the close. Today, the market opens at 10126, a gap higher opening. This is a gap higher opening because the market has opened above the previous day's high price. In using the gap open lower and higher system for T-bond futures, I do not include the night session trading range. I am simply using the open, high, low, and close of the day session. You may want to use the system differently than I do; however, if you do, then I suggest you do some research with it before implementing these changes.

In this case, the gap higher opening establishes the first condition for a possible sell signal. A sell stop would be placed two ticks below the high of the previous day at 10212. You would not be able to use a sell-stop-limit because the Chicago Board of Trade, home of T-bond futures trading, does not accept stop limit orders.

If the market starts to decline and falls two ticks below the previous day's high, you would be stopped in to your short position. Your initial stop loss would be either several ticks above the then-current high of the day, or a money management dollar stop loss as discussed previously.

The psychology for the gap higher open sell is essentially similar to that of the gap lower open buy, only in reverse. When the market opens on a gap higher, those who are short rush to cover their positions and those who wish to get long, thinking the market is strong, support the higher opening. If, however, buying begins to diminish, prices will decline, falling through the gap and into yesterday's trading range by penetrating the previous day's high. This will be cause for concern to those who bought the higher opening and to those who exited short posiВэtions. Those who bought the higher opening and are concerned that a top has occurred will rush to sell their longs. And those who covered short positions on the opening will enter the market to reestablish their short positions. The combined selling of these two groups will force prices lower, and you hope you will be on the correct side of the market by being short. Naturally, both the gap lower buy trade and gap higher sell trade are closed out by the end of the trading session if the rules are being followed. See also Figures 6-8 through 6-11 for examples of gap trades.