1. 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

2. 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
ProTrader Securities Corporation, member NASD/SIPC.
Copyright Bryan C. Babcock 2003

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

4. 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

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

6. 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

7. Copyright Bryan C. Babcock 2003
Gap Up
Market Opening Price
Gap Up
Prior Day Closing Price
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8. Copyright Bryan C. Babcock 2003
Gap Down
Prior Day Closing Price
Gap Down
Market Opening Price
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9. Copyright Bryan C. Babcock 2003
Gap Closure Data
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10. 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

11. 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

12. 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

13. 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 –
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
Copyright Bryan C. Babcock 2003

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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
Time – 9:37 EST
Exit 50% of the position when the entire morning gap is closed
Price 83.24
Copyright Bryan C. Babcock 2003

20. 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

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