In one of my posts yesterday, I mentioned scalp trading 'gaps' on intraday tick charts, and while I wouldn't call myself an authority, I thought I'd elaborate a bit on my recent observations.
Gaps on daily charts have been catgorised into 4 types - breakaway, continuation, exhaustion and common gaps. The first three occur during a strong trending move, while the 'common' gap occurs while a stock is ranging, and as the name suggests it is quite common. When people talk about "all gaps being filled" , it is really the 'common' and the 'exhaustion' gap they should be referring to. The other two may take a long time to be filled, and in some cases may not be filled at all.
Now in the case of intraday tick charts, the 'common' gap appears quite often, and because it is usually filled quickly, it can provide reliable scalping opportunities.
Below is an example from yesterdays HVN 5 tick chart which I hope will elaborate on this idea. This is just an example - I did not trade this stock.
A few points:
I ignore opening gaps. They may or may not be filled on the day. It's the gaps during the rest of the day that I am interested in.
These gaps need to occur during relatively narrow trading ranges. I would suggest a range of 2 - 10c for a mid cap stock would be fairly typical.
What we are looking for with this setup is scalps, not major moves.
The stock preferably needs to be trading with big volumes to enable quick execution of decent sized positions.
My experience has been mostly with 5 tick charts.
1. 11.50am. The price hits a low of 2.11 and then gaps up three times to a high of 2.16. For the gaps to be filled the price needs to retrace to 2.11 (it may even fall further) so draw a horizontal line on the chart at this value. (I have not shown these lines in this example for reasons of clarity).
2. 1.17pm. The price gaps down from 2.16, so again draw a horizontal line, to indicate where this gap will be filled on the swing up.
3. 2.02pm. The price retraces to 2.11 and the gap up at point 1.is filled. Start to look for an entry, bearing in mind that the price could fall further.
4. 2.04pm. The stochastic oscillator turns up and begins to cross above the oversold line and this confirms the entry point.
5. Take a position with enough size to make a scalp trade worthwhile.
6. 2.17pm. The gap down at point 2. is filled and the price is now at 2.16. This is a level which shows some resistance and is a suitable exit point for the trade.
That's pretty much it, and I have found it to be a very consistent way of scalping. The chart I have used has a very well defined range, but this is not always the case. That doesn't matter, as long as the stock is not trending strongly. If there is a strong trend with gaps in it, then these may not get filled on the day and this strategy will not work. In a strong trend, or when a stock breaks out of an extended range, forget gaps and just go for the ride.
You can see a gap that was not filled on the day in the big downward run that occured after the open and just before our trading range developed. It remains to be seen how long it will take for this gap to be filled.
This morning's trading strategy is to find something that isn't being shorted and try and grab a bounce from the opening dump. Following that I'll be looking for trading ranges and gaps.
