Delayed Gap Open Signals (DGO)
On occasion a market will make a very large gap opening up down. The Gap Size (difference between previous days low or high and the open) will be much larger than usual. In such cases, the market will need to make a considerable move up in the case of a gap lower opening, or down in the case of a gap higher opening, before it can trigger entry on the first gap method (GO) I have just described. By the time this occurs, a great deal of the days potential profit may have passed you by. In order to deal with this situation, I have developed the delayed gap open method (DGO) which is designed to provide entry more quickly, and which may be used in conjunction with the first gap method I discussed, thereby resulting in two possible entry signals on any given day. See Figure 6-5 for the ideal DGO buy signal. Heres how the method works.
Delayed Gap Down Buy Signal
- Gap lower opening. In the event of a gap lower opening, you will place a buy stop two ticks above the low of the previous day. This is similar to the basic GO method.
- If at the end of the first hour of trading the buy stop has not been elected, in other words if the market has not triggered you on the long side, you will examine the current price in relation to the current days opening price. If the current price is higher than the opening price by two ticks after the end of the first hour of trading, you will enter the long position at market. Let me review this. If at the end of the first hour of trading the traditional buy gap stop order has not been hit, you will check the current price and the opening price for the day. If the current price is above the open, you will buy at the market. Your initial stop loss will be either a money management stop loss or a stop loss several ticks below the low of the day at the time you are filled.
- If the current price at the end of the first hour is below the opening price, you will enter a buy stop two ticks above the current high of the day. Furthermore, you may also retain your original buy stop two ticks above the low of the previous day in the event that the market begins to make a very large move in the anticipated direction. Should this occur, you will then be long multiple units capitalizing hopefully on both possible signals. See Figure 6-6
Delayed Gap Up Sell Signal
- In the event of a gap higher open, the initial procedure will be the same as the original gap method (GO). You will enter a sell stop two ticks below the high of the previous day.
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- After the first hour of trading, you will check the market. If the current price is below the opening price, you will sell short at the market using either a risk management dollar stop or a stop loss several ticks above the current high of the day.
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- If the market is not below the opening price, you will enter a sell stop order two ticks below the then-current low of the day in order to get you short. In addition, you may retain your original gap-sell-stop two ticks below the high of the previous day in the event that the market begins to move strongly down, thereby giving you two units on the short side.
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As you can see, the one hour gap signal is a technique which allows quicker entry in the event of potentially large moves on the opening, which could limit the potential profit from a delayed buy gap or a delayed sell gap. The best time to use this approach is of course in markets which have opened on significantly large gaps down or up from the previous days low. Finally, remember, that the DGO requires waiting one hour. I have not experimented with different time delays.
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