Day Trading Stocks At Market Open

A great little strategy you can use if you like quick in quick out trading is to play the gap at market opening. You can play a gap up if you like to short, or you can play the gap down if you prefer to go long. If you just love trading then you can go long or short depending on what opportunity presents itself.

What is a Gap Up or Gap Down?

A gap up or gap down is when a stock starts the day considerably higher or lower than it closed at the end of the previous trading session. This could be because of very good news or very bad news which came out after the previous trading session ended.

You can imagine what happens. There’s good news about a company after market closes and every Tom, Dick and Harry either calls their broker or goes online to their trading platform and makes an order to buy shares in that company as soon as market opens.

Before trading begins the following morning the news wires are buzzing about the previous night’s news and those who missed it the night before call their brokers or access trading platforms and make their order to buy at market open.

With all the pre market orders coming through the price of the stock rises considerably such that at market opening it is much higher than it was at the previous session close. This is the ‘gap up’.

Conversely, if it were very bad news then people would be queuing up to sell at market open. This would cause the price to ‘gap down’.

The price at the market open is set by the market makers taking into account the number of buy or sell orders which are queuing in the system, and the amount of hype which is surrounding the stock at the time. They will make money either by short selling to the buyers during a gap up, or buying the shares of those dumping in a gap down, so they need to make sure the gap up or gap down are more than enough to absorb the frenzy and allow them to make money too.

What this means is there is an opportunity to make a profit from an over-bought company during a gap up, or profit from an over-sold company during a gap down. This is because after a gap up the share price will fall until it hits more buyers, and conversely after a gap down the share price will rise when it hits more buyers.

Now the timing is important as the peak after the gap up (or the low after the gap down) takes place about 30 minutes into the trading day. It does vary but 30 minutes is a good rule of thumb. This allows for all the frenzied buy-at-market-open orders (or the sell-at-market-open orders) to get filled.

This extra action at market open is great because it’ll add even more to our profits by the time the trade is over.

The idea of the strategy is to take a short position in the gap up stock (or long position in the gap down stock) about 30 minutes into the trading day when the price changes direction. Getting this exactly spot on takes gut feel from experience and a bit of luck, but getting it close will suffice.

For a gap up stock, within the next 30 to 60 minutes after the change in direction you should see the stock price fall to BELOW the day’s opening price, and perhaps even lower. At this point cover your short, exit the trade and count your profits.

For a gap down stock, within the next 30 to 60 minutes after the change in direction you should see the stock price rise to ABOVE the day’s opening price, and perhaps even higher. At this point sell the shares you bought at open and count your profits.

All in all your day’s trading will be over in an hour to an hour and a half and we’ve experienced gains of up to 15% by trading this one strategy alone.

Remember, IT DOES NOT ALWAYS happen like this, but it does happen more often than not and it’s a strategy worth taking advantage of.

This strategy is covered in more detail in the ‘Ten Steps To Profitable Trading‘ by and it’s worth a look at if you’re thinking about trying this out.


Related Posts