How to make money off opening gap reversals

Dave Landry is principal of Sentive Trading, a money management firm, and a principal of Harvest Capital Management. Mr. Landry is the author of two top selling books, Dave Landry's 10 Best Swing Trader Patterns And Strategies and Dave Landry On Swing Trading. If you would like a free trial to Dave's Nightly Swing Trading Alerts Report click here or call 888-484-8220 ext. 1.

Smoke 'em If You Got 'em

As I've mentioned in the past: Money and position management-- waiting for entries (triggers), the use of protective stops, trailing stops, and profit taking--is crucial to your long-term success as a trader. A simple money management system is to take at least half of your profits when they are equal to or exceed your initial risk. You then move you protective stop on your remaining shares to breakeven. This way, barring overnight gaps, you have a "free" position that has the potential to turn into a homerun (through the use of trailing stops).

Let's follow up on Nasdaq Stock Market (NDAQ | Quote | Chart | News | PowerRating), mentioned recently. Following the rules outlined in my swing trading primer (email me if you need a copy), you see that the stock triggers an entry and then after slow start, sells off nicely. Partial profits (at least half) could (and should) have been taken at this juncture. The protective stop is then moved to breakeven and then trailed lower.

Lehman Brothers (LEH | Quote | Chart | News | PowerRating) provides a similar example:

Don't Be Afraid Of Ogres

Market opens can be a time of greed, fear, or panic as people rush in to or out of stocks. Often though, these gaps can be the high (or near high) for the day (or low or near low). These Opening Gap Reversals, or as I call them, "OGRers", can offer great opportunities. Let's follow up on Diamond Offshore (DO | Quote | Chart | News | PowerRating), mentioned recently.

Noticed that the stock pulls back and then gaps higher. At this juncture you can look to play the opening gap reversal by waiting for a breakdown of the opening range. Once this occurs, a tight stop can be placed right above the opening range.

Of course they don't always work this great, but as you can see, OGRers, especially when in a setup like a pullback, can offer great opportunities with fairly low risk. For more on trading gaps, see my article "Opening Gaps: Fade 'em, Trade 'em, or Ignore 'em." Email me if you need a copy.

On Friday, the Nasdaq rallied in early trading but found its high by mid-morning and began to sell off. It bounced late in the day but resumed its sell off going into the close.

The S&P put in a somewhat similar performance but was a little choppier and did manage to close in the plus column.

So what do we do? I was amazed at the amount of people that came out of the woodwork to call a bottom after just an intra-day reversal. Predict early and often is their motto, I suppose. Me? Well, I'm not good at picking tops or bottoms. So, I just trade in the direction of the big blue arrows. Therefore, continue to focus on the short side but make sure you continue to exercise proper money management just in case "they" are right (some day).

As far as setups, CAT looks like a dog.

Hey Dave

Are you always this good?

Nope--don't confuse brains with a bear market.

Best of luck with your trading on Monday!

Dave Landry

dave@davelandry.com

P.S. Reminder: Protective stops on every trade!

P.P.S. If you would like a free trial to my trading service, click here.