Description
The Gapping Bulls or Gapping Bears Strategies are for traders who like to profit quickly from volatile trading conditions. This page describes how to trade the Gapping Bulls from the long side, but the same tactics can be reversed for the Gapping Bears for short trades. These scans are finding very specific gap patterns. The premise of the scan is that the stock has gapped above the prior days high on big volume. The results are ordered by relative volume so stocks with the greatest relative volume will show up at the top of the list. The scan is geared toward traders who would like to follow the momentum because the scan requires that the stock be in the top half of its range. As a result, stocks in the bottom of the 5-minute OR will not be displayed.

The intent in trading this strategy is to enter trades as early as possible to capture the volatility of the first half hour of the market. Depending on your trading style, you may take profits quickly or hold a position for the whole day. Our objective in creating this strategy is to bring you trading opportunities right on the open. Our recommended approach for trading during the first half hour is to use the 5-minute opening range.

A Disciplined Approach to Trading Gaps
Since the volatility in the first half hour of the market does not allow for a lot of time to analyze candidates, your approach to trading them should be simple and easy to follow. The 5-minute opening range breakout approach is ideal for this scan. If you are going to trade this strategy, on these stocks, at this time of the day you need to make sure you understand the most important rule:

There are a lot of nuances that can be learned from all the Opening Range training offered on this site, and they all apply to the 5-minute OR. However, if you are trading in the first 30 minutes of the day, your approach to trading the Gapping Bulls should be as simple as the following steps:

1. Buy the OR breakout.
2. Set your protective stop below the low of the day.
3. As the stock moves higher adjust your trailing stop to lock in profits.
4. Proactively scale out of your position at profit objectives (targets).

1. Discipline!
2. Discipline!!
3. Discipline!!!
4. An easy to define protective stop (I just gave you that)
5. An easy to define trailing stop
6. Easy to define profit targets
7. More discipline

The emphasis on discipline here is because the volatility in these stocks will result in severe losses for anyone who does use good trading discipline. In order to consistently make money in the market you must be disciplined about choosing the trades, taking profits, and taking losses.

Easy to define trailing stops
There are a lot of trailing stop tactics. The success of one versus another is often a function of general market conditions, individual stock personalities, the underlying reason for a stocks trend that day, and more. If you don't have a trailing stop discipline, here are three trailing stop tactics you should consider as good ways to capture profits quickly. Do not expect to ride a stock all day with these trailing stops, but these will keep you out of trouble and keep you in the really great movers during their initial surge. While these can be improved upon to maximize profits and prevent getting stopped out of the stocks that are not easy, that level of instruction is beyond the scope of this page.

1. The low of the prior 5-minute bar (plus a fudge factor). Yes that's it. The "fudge factor" is a few cents or more based on the normal volatility of the stock - you decide. When these Gapping Bulls run they don't trade lower than the low of the prior bar on a 5-minute chart. The stop is a fudge factor below the prior bars low on a 5-minute chart. One nuance of this method is that if there are two bars with lows close together consider using the lower of the two.
2. A close below a short-term moving average on the 1-minute chart. A good place to start is a simple 10-period moving average on a one minute chart. Since this is a trailing stop, you will find this more successful if you wait for a close below the moving average rather than just a trade below it.
3. A new swing low on the one minute chart. If you do not know what a swing low means you can find a discussion of how to define and use swing points on page 13 of the free trading book we offer, "Trading The 10 O'clock Bulls".

Easy to define profit targets
If you think of a profit target in terms of trying to pick the high the day then defining your targets will be impossible. If you think of a profit target as how far the stock must go before you will get out then you will be disappointed. If you think of profit targets as a function of money management and/or areas of resistance then defining your targets should not be that hard. This means thinking of your target as a reasonable expectation for how far the stock could move without having to overcome significant resistance. The purpose of the target is to be able to anticipate prudent areas to take profits, not to predict the stocks high for the day, week, month etc. Here are a few ways to identify profit targets:

• Trader Pivot - R2. This is a calculated level of resistance based on the prior day's range. You will find the calculation of this level and other important calculated pivots on the HotScans quote page. This level is very often a significant level of resistance. If your stock demonstrates that it is having a hard time getting above R2 you should consider taking profits on at least a portion of the trade.

• Resistance on the chart. Look for areas of resistance created by prior highs, lows or moving averages.

• A percentage of the stocks average range. If a stock is showing up on the Gapping Bulls scan it is very likely to have an above average range day. Therefore, it is not unreasonable to expect that the stock could have a range (not including the gap) that is at least average or even 2 or 3 times its average. There isn't a magic number, but when a stock has traded twice its average range early in the day you should consider taking profits if you are day-trading the gap.

• Money management. As you develop your own style of trading the gaps you will get a feel for how often your trades are immediately profitable and to what extent they are profitable. With this information it is often possible to develop a methodology which is based on taking profits based on a percentage price change or a dollar per share amount. For example, you may find that you could take $1.00 per share out of these trades better than 75% of the time. If this is true, and you can limit your losses to $0.50 based on a pure money management stop, then you have a great and simple trading plan by simple taking the first $1.00 and setting your protective stop at $0.50 even if it is not the low of day. This is why journaling and reviewing your trades is so important. It enables you to see patterns like this in your trading.

How To Find The Best Candidates
There are a few qualities to watch out for that tend to lead to the most explosive situations:

• "Unexpectedly" good news. Earnings announcements are the most common form of good news driving gaps, but it is not uncommon for a stock to gap higher on good earnings only to sell off sharply. The key is to know whether the news is good or unexpectedly good. Differentiating between the two can take homework (to know what was expected), and experience to learn how to recognize key words or conditions within the news. This is beyond the scope of this page, but you should know that not all good news is equal and know that it is the unexpectedly good news that makes for the most explosive gaps. Experience reading the intra-day charts will also help you to recognize the good from the bad. This is why HotScans is so powerful during earnings season - it focuses you on the stocks that are doing the best regardless of the quality of the news.

• The daily, weekly and monthly trends. The Gapping Bull strategy will identify exhaustion gaps just the same as a breakaway gap. How do you know which one it is going to be in the first few minutes? Gaps breaking away out of a multi-week consolidation are a good bet. A big gap coming after weeks of a strong run may be just as bullish as any other, but they run a higher risk of being an exhaustion gap. Additionally, big up gaps in a strong down also run a higher risk of failing.

• Check Resistance. Make sure the gap is not sitting right below major resistance.

Additional Resources to Improve Your Trading:

• Paul Woldt, an avid HotScans user, has kindly posted a large amount of his experiences with, and research on, the Gapping Bull strategy on the HotScans message board. You can find this information on the message board in the files section in the "Bull Gap Scan Files" folder.

• TradeStation users: Download our TS add-ons that enable you to automatically see important price levels on your charts, and set alerts right from the chart! Download TS add-ons here.

• TradeStation and RealTick users: Link HotScans to your platform! This enables you to click on a symbol in HS and have your platform window update with that symbol. Download Dataview Platform Linking here.

• Free book on how to trade Opening Range Strategies: Trading The 10 O'clock Bulls

• An extensive online course teaching money management, trading tactics, technical analysis and more. This course is focused on all aspects of trading the Opening Range, long and short, for consistent profits. For information see Trading Opening Range Breakouts in the training area of the site. To order it, email geoff@marketgauge.com.

•  Other Dataview Trading Briefs like this one: HotScans Training.

Trading Tips:

• Start small. This is a very quick and volatile trade set up. Trade fewer shares than you would with other strategies until you are comfortable with your trading tactics.

• Have a plan. Decide before the market opens whether you are looking to be out quickly or give the stocks room to run all day. This will help you react quickly to the price action at your targets.

• Don't forget about the retracements.Often times the stock will break out and then retrace back to the OR high where it will find support and make and even larger move through the HOD. Watch for this opportunity, especially if the retracement is brought on by weakness in the general market.

Helpful Scanning Hints:

• Focus on high volume, high average range stocks. This strategy's default settings are set to find stocks with an average range of at least $0.50. This is low. If you don't mind trading more volatile stocks, increase the Avg. Rng. filter in the Basic Filters to at least $0.75 or even $1.00.

• Use the "% Off High" and "From Open" columns to focus on the strongest stocks first. Another easy way to focus on the stocks moving higher and avoid wasting time on stocks going in the wrong direction is to focus on the stocks that are in the top half of their range for the day. This is indicated by the "% Off High" column. A value between 0 and -50 means the stock is in the top of its range for the day. A reading of "0" means it is making a new high for the day. If you focus on these stocks that are acting well you will save a lot of time.

• Use the pre-market & portfolio features. The pre-market will not catch all Gapping Bulls, but it will catch some. Review the pre-market scans for the big movers. You can tell which ones are trading above their prior day's high by simply looking at the "Day Patt" column. This shows you where the stock has and is trading relative to the prior day's range in the same way this icon does for the OR in the regular sesson. So a green arrow, , indicates that the stock is trading above yesterday's high which is one of the primary criteria of a Gapping Bull. The next is big volume which you can also get a heads up on in the pre-market scans.

• Use this scan at the end of the day. Any stock that qualifies as a good Gapping Bull today should be on your watch list for at least the next few days to a week. This is a great end of day scan for tomorrow's movers.