The Essence of Success – Reality Alignment

Last night’s open-gap in the US Indices provides a stark example of the need to align the ‘out-there’ by the ‘in-here’.

My open-gap guidelines provide a robust setup when there is an open-gap in the day session. By open-gap I mean a gap between the close of yesterday and the open of today’s day session. The open-gap needs to be at equal to and, even better, greater than 50% of the 14-day ATR.

The first criteria is to determine the trader’s timeframe trend and ask:

continuation or change? 

The answer provides the strategy. Let’s say for the Russell, I determine that the 18-day trend is up. So, I’d be looking to go long. Here’s a  simplification of the entry process.

The open-gap setup uses the 15-min charts. I like to see an entry signal generated in the first hour.

In the chart above, the Russell attempted to sell-off. That sell-off failed. I’d have entered on the close of the second 15-minute bar.  The entry signal suggested that we’d see a close of 50% of the open-gap. And, if we saw that in the first 60-minutes of day session trading, then it was likely we’d see the close of the open-gap, and probably, see a close near the highs.

The stop was around seven points and the profit target, around sixteen to twenty-five. That gave a reward: risk of at least 2: 1.

But what about if I had decided to sell the Russell instead of buying? Suppose I sold the close of the first 15-minutes?

I’d have exited the shorts on the close of the second 15-minute bar. Here’s where we have to trust our setups. I know from testing and experience that the open-gap ought not to reverse from a sell-off. Once it did, it was a signal that I was wrong about the Russell’s direction for the day. Remaining in the short trade would have been a misalignment of the ‘in-here’ with ‘out-there’.

Success requires we continually monitor market information to ensure that our perception and reality align.

(By the way, my open-gap guidelines for ‘change in trend’ trades are different from the ‘go-with’ trend trades. Based on those guidelines, there was no short signal in the Russell last night).