I love it when trades work out as close to perfect as possible. Apple Inc () exhibited a classic 1,2,3 Gap Fade play this morning that allowed for major profits for aggressive traders:
The 1,2,3 Gap Play is as follows:
First trade with a gap is to FADE the gap and play for yesterday’s close. Generally, it’s best to give a few minutes of shake-out and enter when price begins to close the gap. Aggressive traders can enter to fade a gap immediately, but placing stops can be difficult
Gap Fill (first trade exit with profit) and reverse trade to play the initial impulse, which was a down impulse. This is based on the principle “Momentum Precedes Price” in that the initial gap is a large momentum impulse and the ‘fade’ is the retracement. Once the gap is filled, this sets up the classic “Impulse Sell” (or “Impulse Buy”) trade. The target can be the original intraday price low, or often just beyond that. New momentum lows (indicated by the blue oscillator) mean that odds favor that new price lows are yet to come
Impulse Sell exit with profit. The new momentum low reading correctly forecast lower prices, and did so rapidly, so nimble traders were able to take advantage of most of the move. The “3″ signifies the Impulse Sell trade’s exit with profit. No more trades can be made based on the 1,2,3 pattern.
Gap plays need to be traded aggressively and with confidence, and realize that if the first trade is stopped out, odds switch to favor continued price movement in the original direction of the impulse, and that the price action for the day will be that of a “Trend Day” structure.
Also, realize that gap fades require no indicators at all, other than price itself. Complex indicators can degrade the edge present in this simple strategy.