High probability pattern for targeting the closing gap

Mark Austin:

Today our video is about closing gaps.

The closing gap is marked against the previous day’s close.

Every day the FTSE opens at eight o’clock in the morning and it closes at 4:30 PM UK time.

The level at which it closes is what we want to focus on. Yesterday we can see that the FTSE closed at 7,500.

If we open up the next day above the previous day’s close, we call that an up gap. And if we open below the previous day’s close, we call it a down gap.

We’re expecting the market to move back down to fill the gap at 7,500 and we call that closing the gap.

The pattern we want for this is actually three up days in a row. The stop will be 30% ATR. ATR stands for average true range and it’s 30% of the five day average true range. So whatever the FTSE’s moved on average over the last five days, 30% of that is our stop. Now the same applies to the downside as well. If we’ve had three down days in a row and we gap below, so we open below the previous day’s low, we would buy for a retracement back to the previous day’s close as well.

Now in terms of risk reward, sometimes the opening price and your stop won’t be in line, in which case it might make sense to wait for a spike up. Today just for example, just say 30% ATR is 20 points. We’re looking to sell the open or just before the open, we’ve got a 20 point stop and just say the market opened at 7,507, well the risk reward is imbalanced there, so in that case I would wait for a spike up.

We did something similar in the live room yesterday. We couldn’t get the right risk reward. So instead we waited patiently for the market to spike up.

Now if it doesn’t spike up, but it moves to target, well then that’s just a missed trade. That’s the way it goes sometimes. But it’s important to try and get a one to one on your trades or near enough. It doesn’t have to be bang on one to one. But if risking one and you making one and you’ve got at least a 70% hit rate, then you’ve got a license to print money. That’s really what you are after.

When we get three up days in a row, we get an up gap, we get three down days in a row and we get a down gap, the market’s out of balance.

And remember the big traders don’t want to buy or sell the highest or lowest prices. They’re looking for pullbacks in the market and that’s why this works so well.