By: Bryan Babcock February 8, 2003 Denver Trading Group The Trader’s Edge By: Bryan Babcock February 8, 2003 Denver Trading Group Copyright Bryan C. Babcock 2003

Important Disclosure and Disclaimer Information This presentation is a service offered by ProTrader Securities Corporation (“ProTrader”) to allow our clients and prospective clients a forum to discuss current trading issues with Bryan Babcock, one of the owners of the ProTrader Denver office. Mr. Babcock is a registered representative of ProTrader. The information and opinions in this presentation are the opinions of the individuals speaking and do not necessarily reflect the opinions of ProTrader, its affiliates or affiliated persons. ProTrader disclaims any responsibility for the views expressed by persons speaking in this presentation. ProTrader does not provide, nor does it intend to provide, legal, tax, accounting, or investment advice and nothing mentioned in this presentation should be construed to be such advice. ProTrader and any of its affiliates may have positions in and effect transactions in securities of companies mentioned in this presentation. The investments or strategies presented are not suitable for all investors. Day trading involves financial risks and could result in the loss of a client’s entire trading equity. Trading on margin may result in losses exceeding deposits made into a margin account. Market volume and volatility may delay system access and trade executions for full risk disclosure ask one of the representatives at our booth or visit our website at www.protrader.com ProTrader Securities Corporation, member NASD/SIPC. Copyright Bryan C. Babcock 2003

Presentation Goals – Session 1 Morning Gap Identification Morning Gap Reversal Entry Morning Gap Reversal Exit Questions Copyright Bryan C. Babcock 2003

By: Bryan Babcock and Arthur Agnelli Active Trader Magazine, May 2003 Gap Reversal Strategy By: Bryan Babcock and Arthur Agnelli Active Trader Magazine, May 2003 Copyright Bryan C. Babcock 2003

What the Reversal Looks Like Market Open Price Gap Up Reversal Prior Day Close Copyright Bryan C. Babcock 2003

Copyright Bryan C. Babcock 2003 What is a GAP Each morning the opening price of indexes (or stocks) is higher or lower than the closing price the prior day. This change in price is called the morning gap. A gap is said to be a “Gap Up” if the change is positive; and a “Gap Down” if the change is negative. Statistically there is a very high likelihood that these gaps will close between 50% and 100% while trading during the day. Usually this reversal of direction will occur within the first 30 minutes of trading (by 10:00 AM EST). Copyright Bryan C. Babcock 2003

Copyright Bryan C. Babcock 2003 Gap Up Market Opening Price Gap Up Prior Day Closing Price Copyright Bryan C. Babcock 2003

Copyright Bryan C. Babcock 2003 Gap Down Prior Day Closing Price Gap Down Market Opening Price Copyright Bryan C. Babcock 2003

Copyright Bryan C. Babcock 2003 Gap Closure Data Copyright Bryan C. Babcock 2003

Copyright Bryan C. Babcock 2003 Gap Up - Time Patterns Morning Open – Gap Up Morning Peak on average 9:36 AM EST Price Jig- Usually 9:42 – 9:47 AM Prior day closing price Trade is maximized at 9:53 AM Copyright Bryan C. Babcock 2003

Gap Down – Time Patterns Trade is maximized at 9:53 AM Prior day closing price Price Jig- Usually 9:42 – 9:47 AM Morning Open – Gap Down Morning Bottom on average 9:36 AM EST Copyright Bryan C. Babcock 2003

Copyright Bryan C. Babcock 2003 What to Trade Index Tracking Stocks vs. Stocks High success rate Moderate profit potential Ease of short selling (index tracking stocks are not subject to the up-tick rule) NASDAQ 100: QQQ Ratio 40:1 S&P 500: SPY Ratio 10:1 Dow Jones Industrials: DIA Ratio 100:1 Copyright Bryan C. Babcock 2003

Identify The GAP Before the Market Open CNBC futures bug – Futures: S&P, NASDAQ and DOW – When you wake up Chicago Mercantile Exchange web site at – www.cme.com Continue to monitor how the trading action of futures in the pre-market is affected by economic reports that may be released at 8:30 AM EST Check Support and Resistance Levels – See www.jservices.com Copyright Bryan C. Babcock 2003

Strategy Disqualification All Futures Gapping in the Same Direction NASDAQ, Dow Jones, S&P 500 Narrow Gap NASDAQ > 10 S&P > 5 Dow Jones > 20 Change of Gap Direction in Last Pre-market Hour Copyright Bryan C. Babcock 2003

Copyright Bryan C. Babcock 2003 Entry Strategies Time Entry (9:36 AM EST) Advantage of being easy Disadvantage is that the trader may be entering a position that becomes a loss immediately and money management can become a problem Pattern Entry After the second completed one minute move in the direction of the reversal Advantage of this entry is that the trader waits for the market to confirm the reversal prior to entry Disadvantage is that the trader is always late to the party and may miss significant profits Copyright Bryan C. Babcock 2003

Copyright Bryan C. Babcock 2003 Pattern Entry This example shows a morning gap up where the reversal would be an anticipated move lower. Pattern Entry: Second completed consecutive one minute move in the direction of the reversal Copyright Bryan C. Babcock 2003

Entry Strategies - Continued Staggered Entry Breaks the entry into two equal halves First half of the trade is placed at 9:31 AM Second half of the trade is entered after two completed one-minute moves by the stock in the desired direction Ensures that if the market reverses quickly, the trader has a partial position already in the market If the market performs poorly, only half the trade is exposed Copyright Bryan C. Babcock 2003

Trade Management & Exit Let the market control your profit while you control your risk High-Low Stop Trades fifteen cents ($0.15) above a new high (in up gaps) or below a new low (in down gaps) after 9:45 AM the position should be closed Trailing Stop Breakeven stop after $0.25 in profits Moving $.25 trailing stop Time Stop 9:55 AM EST 50% at 100% Closure Don’t Forget the Jig Copyright Bryan C. Babcock 2003

Copyright Bryan C. Babcock 2003 Trading Example Initial Stop Loss is placed at a new morning high plus $0.15 Pattern Entry: 2 – One minute consecutive moves in the direction of the reversal Exit remaining position at 9:55 AM EST – Time Stop Price: 83.47 Entry: Price - 83.74 Time – 9:37 EST Exit 50% of the position when the entire morning gap is closed Price 83.24 Copyright Bryan C. Babcock 2003

Trading Example - Summary DIA Gap Up Entered at 9:37 AM EST for a price of $83.74 Initial stop loss is placed at $84.07 50% of the position is closed – booking a profit of fifty cents ($0.50) – when the Gap is closed Time stop is reached and the second half of the trade is closed at $83.47 Total profit for the entire position is just over thirty-eight cents ($0.38) Copyright Bryan C. Babcock 2003

Copyright Bryan C. Babcock 2003 Session One Questions Copyright Bryan C. Babcock 2003