visual schematics of gap buy and sell trades.Figure 12.3 shows how the gap buy and sell signals look on an S&P
futures chart.
FOLLOW-THROUGH ON GAP TRADES
As noted earlier, there are three aspects to the gap trade method. We havealready examined them in general terms. Now let us get speciﬁc.
JWPR004-12
JWPR004-Bernstein
February 9, 2007
21:24
Char Count= 0
Three Powerful Price Patterns: Part I
101
CL-055: Cryde Oil NY (Pit) Cont 1st (Daily bars)
www.GenesisFT.com7/12/2005 = 61.48 (+1.40)
Gap higher open day 2
Day 1
Price falls below high of day 1sell trigger.
FIGURE 12.1 Schematic of ideal GTS that triggered.Source: Courtesy of www.GenesisFT.com.
63.6
63.4
63.2
63
62.8
62.6
62.4
62.2
62
61.8
61.663.661.4
61.2
61
60.8
60.6
60.4
60.2
60
59.8
59.6
59.4
59.2
59
58.8
58.6
(cid:2)
(cid:2)
If a market opens on a gap above the high of the previous day by morethan a certain amount (i.e., the penetration amount), then place an orderto go short a given amount below the high of the last day (see belowfor amount).The amount that a market opens above the high of the last day is calledgap size (GS).
CL-055: Cryde Oil NY (Pit) Cont 1st (Daily bars)
www.GenesisFT.com02/02/2005 = 47.15 (-0.42)
Day 1
Gap lower open next day:Buy setup.
Market gose uptroughlow of Day 1:Buy trigger.
FIGURE 12.2 Schematic of ideal GTB that triggered.Source: Courtesy of www.GenesisFT.com.
5150.850.650.450.25049.849.649.449.24948.848.648.448.24847.847.647.447.247.154746.846.646.446.24645.845.645.445.245
JWPR004-12
JWPR004-Bernstein
February 9, 2007
21:24
Char Count= 0
102
30 DAYS TO MARKET MASTERY
SP-055: S&P 500 Index (Pit) Cont 1st (Daily bars)
www.GenesisFT.com
08/12/2005 = 1231.0 (-7.4)
GTStriggered
GTBon trigger
GTSon trigger
GTS on trigger
GTS triggered
GTB triggered
GTBtriggered
06/21/05
07/06/05
07/20/05
08/03/05
08/17/05
FIGURE 12.3 Various gap setups and triggers.Source: Courtesy of www.GenesisFT.com.
1265
1260
1255
1250
1245
1240
1235
1231.01230
1225
1220
1215
1210
1205
1200
1195
1190
1185
1180
1175
1170
(cid:2)
(cid:2)(cid:2)
(cid:2)(cid:2)
(cid:2)
(cid:2)(cid:2)(cid:2)
(cid:2)(cid:2)
The amount that a market must drop back below the high of the lastday is called the penetration amount (PA).In futures markets, the GS should be at least two ticks.In stocks the GS should be at least 5 percent of the previous daily tradingrange. For example, if a stock had a high of 35 and a low of 33 on theprevious day, then the range is 2.00 and 5 percent of a 2.00 range is10 cents. Therefore, the size of the opening of the next day should beat least 35.10 for a gap up open or a 32.90 for a gap down open.In futures the PA should be at least two ticks.In stocks the PA should be at least 5 percent of the previous daily rangeas described in this list.Once a trade has triggered, you can do the following:(cid:2)
Use a dollar-risk stop. This is not the best stop-loss because it is notsystem related. It is, however, one way of limiting risk.Use a stop-loss that is 25 percent of the previous daily range abovethe price at which your trade triggered (examples to come).
(cid:2)
Exit your trade at the end of the day if not stopped out.If you trade multiple positions then do the following:When the trade has made a proﬁt equal to the range of the previous daytake proﬁt on one-third of your position and place a follow-up stop-lossat breakeven.Exit another third of your position at the end of the day.Exit the remaining third of your position either at the breakeven stop-loss or on the ﬁrst proﬁtable opening (FPO).
See the next section for explanation of FPO.
JWPR004-12
JWPR004-Bernstein
February 9, 2007
21:24
Char Count= 0
Three Powerful Price Patterns: Part I
103
FIRST PROFITABLE OPENINGEXIT RULE (FPO)
The exit strategy is one of the most important aspects of a short-term trade. Iﬁrst learned about the FPO exit from the long time trader and internationallyknown newsletter writer, Larry Williams. FPO is a very simple strategy. Itmeans exactly what it says—you exit your position the ﬁrst time it opens ata proﬁt compared to the price at which you entered. If you are short, thenyou exit the ﬁrst time the market opens at any price lower than the priceyou got in. If you are long, then you get out the ﬁrst time the market opensat any price higher than the price at which you entered.
SAMPLE GAP TRADES: START TO FINISH
Figure 12.4 and Figure 12.5 demonstrate two sample gap trades from startto ﬁnish, one in a futures and one in a stock contract, complete with anno-tations showing application of the rules stated above.
Notes:
A: Gap higher open. Trade triggered short sale as it fell back throughthe previous days high. Short @ 108.20 with an exit at end of day at105.30 and an FPO the next day on remainder of position at 105.
KC-200509: Coffee Sep 2005 (Daily bars)
www.GenesisFT.com08/12/2005 = 104.90 (-1.85)
E
110
109
108
107
106
105104.90
104
103
102
101
100
99
98
97
96
A
B
D
C
07/06/05
07/20/05
08/03/05
FIGURE 12.4 Gap trades in coffee futures.Source: Courtesy of www.GenesisFT.com.
JWPR004-12
JWPR004-Bernstein
February 9, 2007
21:24
Char Count= 0
104
30 DAYS TO MARKET MASTERY
A
C
A
B
XOM: ExxonMobil Corp (Daily bars)
www.GenesisFT.com08/12/2005 = 61.05 (+0.10)
D
E
61.4
61.261.0561
60.8
60.6
60.4
60.2
60
59.8
59.6
59.4
59.2
59
58.8
58.6
58.4
58.2
58
57.8
57.6
57.4
07/07/05
07/21/05
08/04/05
FIGURE 12.5 Gap trades in the stock of Exxon Mobil.Source: Courtesy of www.GenesisFT.com.
B: Gap higher open. Trade triggered short sale as it fell back throughthe previous days high. Short at 99.05 out at a loss at the end of theday at 99.45.
C: Gap lower open. Trade triggered a buy as it penetrated back throughthe low of the previous day. Long @ 98.80 with an exit at end of dayat 102.10. Another third of position out on FPO at 101.50.
D: Gap lower open. Long at 100.50. Out at a loss at the end of the day
at 99.35.
E: Gap lower open. Buy triggered at 106.20. Out at end of the day at a
loss at 104.90.
Notes:
A: Gap higher open. Sell triggered at 60.25. Trade closed out at a proﬁtat the end of the day at 59.11. Remainder of trade closed out on FPOnext day at 58.65.
B: Gap lower open. Buy triggered at 59.11. Trade closed out at a proﬁtat end of day at 59.52. Balance closed out on FPO next day at 59.68.
C: Gap higher open. Sell triggered at 59.48. Trade closed out at a proﬁtat end of day at 59.40. Balance of trade closed on FPO at 59.39.
D: Gap higher open. Short sell triggered at 59.60. Closed out at a loss
at the end of the day at 59.94.
JWPR004-12
JWPR004-Bernstein
February 9, 2007
21:24
Char Count= 0
Three Powerful Price Patterns: Part I
105
E: Gap higher open. Short sell triggered at 59.78. Trade closed out atthe end of the day at 59.00. Balance of trade closed out on FPO at58.97.
REVIEW
This lesson deﬁned the gap trade with concise illustrations and deﬁnitions.Practical application of the method was stressed with speciﬁc examples.Please spend some time studying gap trades and applying your knowledgeto the charts in the quiz that follows.
Please take a few minutes to answer the questions below. Note that this
quiz will require more attention than previous quizzes. Take your time!
LESSON 12 QUIZ
Instructions: Mark the required points carefully according to your best esti-mate. You need not indicate the exact prices at which trades were triggeredor closed out.
1. Mark the gap up and gap down days on the chart below and whether they
triggered or not.
Source: Courtesy of www.GenesisFT.com.
JWPR004-12
JWPR004-Bernstein
February 9, 2007
21:24
Char Count= 0
106
30 DAYS TO MARKET MASTERY
2. Mark only the gap trades that triggered. Use your best estimate rather
than calculating the exact points.
Source: Courtesy of www.GenesisFT.com.
3. Mark only the gap trades that triggered. Use your best estimate rather
than calculating the exact points.
Source: Courtesy of www.GenesisFT.com.
JWPR004-12
JWPR004-Bernstein
February 9, 2007
21:24
Char Count= 0
Three Powerful Price Patterns: Part I
107
4. Mark only the gap trades that triggered. Use your best estimate rather
than calculating the exact points.
Source: Courtesy of www.GenesisFT.com.
5. Mark the gap trade that ﬁlled as well as the FPO point for this trade.
Source: Courtesy of www.GenesisFT.com.
JWPR004-12
JWPR004-Bernstein
February 9, 2007
21:24
Char Count= 0
108
30 DAYS TO MARKET MASTERY
6. Mark the gap trade that ﬁlled as well as the FPO point for this trade.
Source: Courtesy of www.GenesisFT.com.
JWPR004-13
JWPR004-Bernstein
February 16, 2007
20:30
Char Count= 0
L E S S O N 13, D A Y 13
Three PowerfulPrice Patterns:Part II
L esson 12 taught you the gap trade pattern. This pattern is also based
on a gap but not a gap that is ﬁlled, rather on a gap that is not ﬁlled!To see what I mean by this last statement, read on.
PATTERN 2: THE TWO-DAY BREAKAWAY GAP
Some traders believe that a gap on a chart is signiﬁcant. While I agree, Ibelieve that most traders do not use chart gaps properly. To rectify thatsituation, let us look at gaps again. Before looking at a chart let’s deﬁne theterm “gap.”
(cid:2)
(cid:2)
(cid:2)
A gap up occurs when a market opens above the high of the previousday and does not trade into the range of the previous day.A gap down occurs when a market opens below the low of the previousday and does not trade into the range of the previous day.Note that gaps can only be used on day session charts, not 24-hourcharts.
Figure 13.1 shows examples of gap-up and gap-down patterns.Most traders are familiar with gaps, of which there are several types.The gaps described above are all gaps, however, some are one-day gaps andothers are two-day gaps. What is the difference? A one-day gap is a gap that
109
JWPR004-13
JWPR004-Bernstein
February 16, 2007
20:30
Char Count= 0
110
30 DAYS TO MARKET MASTERY
EU-055: Euro FX (Pit) Cont 1st (Daily bars)
www.GenesisFT.com08/17/2005 = 1.2278 (-0.0096)
GD
GU
GU
GD
GU
GU
GD
GU
GD
Jul-05
Jun-05
Aug-05
Sep-05
FIGURE 13.1 How gap-up and gap-down patterns look on a chart.Source: Courtesy of www.GenesisFT.com.
1.265
1.26
1.255
1.25
1.245
1.24
1.235
1.231.2278
1.225
1.22
1.215
1.21
1.205
1.2
1.195
1.19
develops over the course of one day. A two-day gap occurs over a two-daytimeframe.
In terms of its reliability, the two-day gap results are signiﬁcantly betterthan the one-day gap. Figure 13.2 shows a chart example of two-day gap-upand gap-down patterns.
SF-200509: Swiss Franc (Pit) Sep 2005 (Daily bars)
www.GenesisFT.com
2 GD
2 GD
2 GD
2 GU
2 GU
Jul-05
Aug-05
Sep-05
FIGURE 13.2 Two-day gap-up and gap-down patterns.Source: Courtesy of www.GenesisFT.com.
JWPR004-13
JWPR004-Bernstein
February 16, 2007
20:30
Char Count= 0
Three Powerful Price Patterns: Part II
111
SETUP AND TRIGGER
Now look at the setup and trigger for a two-day gap.
(cid:2)
(cid:2)
(cid:2)
(cid:2)
Setup for a buy is a one-day gap up with this trigger: If the low of day 2and the low of day 3 are higher than the high of day 1, then a two-daygap up has triggered on the close of day 3.Setup for a sell is a one-day gap down with this trigger: If the high ofday 2 and the high of day 3 are lower than the low of day 1, then a two-day gap down has triggered on the close of day 3. Figure 13.3 illustratesthe two-day gap-up and two-day gap-down setups and triggers.Entry for a long position on the two-day gap up is on the close of tradingon the second day.Entry for a short position on the two-day gap down is on the close oftrading on the second day.
Figure 13.4 illustrates the signals.
FOLLOW-THROUGH
(cid:2)
The proﬁt target is the range of the two days that constitute the gap atwhich point you take proﬁt on part of your position. Then you trail astop at 75 percent on the balance of your position (i.e., locking in 75percent of the proﬁt).
2-day gap downsetup and trigger
Selltriggeron closeof day 3.
Buy triggeron close ofday 3.
2-day gap upsetup andtrigger
FIGURE 13.3 Two-day gap-up and gap-down setup and trigger.
JWPR004-13
JWPR004-Bernstein
February 16, 2007
20:30
Char Count= 0
112
30 DAYS TO MARKET MASTERY
SF-200509: Swiss  Franc (Pit) Sep 2005 (Daily bars)
www.GenesisFT.com08/22/2005 = 0.7888 (+0.0020)
2 GD
Sell
2 GD
Sell
Buy
2 GD
2 GU
2 GU
Buy
Sell
0.806
0.804
0.802
0.8
0.798
0.796
0.794
0.792
0.790.78880.788
0.786
0.784
0.782
0.78
0.778
0.776
0.774
0.772
0.77
0.768
Jul-05
Aug-05
Sep-05
FIGURE 13.4 Two-day gap-up and gap-down setup and trigger.Source: Courtesy of www.GenesisFT.com.
(cid:2)
(cid:2)
The initial stop-loss is a close above the highest high of the two days ofa sell gap or a close below the lowest low of the two days of the buygap.Do not add to your position in the event of another signal in the samedirection.
Figure 13.5 shows the gap signals as well as their entry and exit points.
SF-200509: Swiss Franc (Pit) Sep 2005 (Daily bars)
www.GenesisFT.com08/22/2005 = 0.7888 (+0.0020)
2 GD
Sell
Profittargethit
2 GD
TS exit
2 GU
Buy
Sell
Profittarget
Profittargethit
TS exit
Jul-05
Aug-05
Sep-05
FIGURE 13.5 Gap signals entry and exit.Source: Courtesy of www.GenesisFT.com.
0.806
0.804
0.802
0.8
0.798
0.796
0.794
0.792
0.790.78880.788
0.786
0.784
0.782
0.78
0.778
0.776
0.774
0.772
0.77
0.768
JWPR004-13
JWPR004-Bernstein
February 16, 2007
20:30
Char Count= 0
Three Powerful Price Patterns: Part II
113
BP-200509: British Pound (Pit) Sep 2005 (Daily bars)
www.GenesisFT.com07/18/2005 = 1.7457 (-0.0028)
2 GD sell
Profi target
Actual exit at profit:Initiate TS.
Out on TS
1.835
1.83
1.825
1.82
1.815
1.81
1.80.5
1.8
1.795
1.79
1.785
1.78
1.775
1.77
1.765
1.76
1.755
1.75
1.74571.745
1.74
1.735
1.73
1.725
06/20/05
07/05/05
FIGURE 13.6 Another example of a gap trade.Source: Courtesy of www.GenesisFT.com.
ANOTHER EXAMPLE
Figure 13.6 gives another example. Here the chart shows a two-day gapthat was ﬁlled. First proﬁt target was exceeded and a trailing stop was thenimplemented. Trade was stopped out as noted.
REVIEW
This lesson deﬁned the two-day gap trade with concise illustrations anddeﬁnitions. Practical application of the method was stressed with speciﬁcexamples. Please spend some time studying two-day gap trades and applyingyour knowledge to the charts in the quiz that follows.
Please take a few minutes to answer the questions below. Note that this
quiz will require more attention than previous quizzes. Take your time.
LESSON 13 QUIZ
Instructions: Please follow the indicated instructions carefully. Mark thesignals, trades, and exits according to your best estimate. You need notindicate the exact prices at which trades were triggered or closed out unlessyou have access to a chart with exact prices.
JWPR004-13
JWPR004-Bernstein
February 16, 2007
20:30
Char Count= 0
114
30 DAYS TO MARKET MASTERY
For items 1 through 3, ﬁnd and mark the two-day gap-up and gap-down
triggers.
1.
BO-200509:  Soybean Oil (Pit) Sep 2005 (Daily bars)
www.GenesisFT.com07/20/2005 = 24.82 (+0.21)
06/08/05
06/22/05
07/07/05
Source: Courtesy of www.GenesisFT.com.
2.
CT-200510:  COTTON #2 Oct 2005 (Daily bars)
www.GenesisFT.com07/20/2005 = 48.25 (-0.20)
26.6
26.4
26.2
26
25.8
25.6
25.4
25.2
25
24.82
24.6
24.4
24.2
24
23.8
23.6
23.4
23.2
23
22.8
55.5
55
54.5
54
53.5
53
52.5
52
51.5
51
50.5
50
49.5
49
48.548.2548
06/08/05
06/22/05
07/07/05
Source: Courtesy of www.GenesisFT.com.
JWPR004-13
JWPR004-Bernstein
February 16, 2007
20:30
Char Count= 0
Three Powerful Price Patterns: Part II
115
3.
LH-200510:  Lean Hogs (Pit) Oct 2005 (Daily bars)
www.GenesisFT.com08/23/2005 = 61.675 (-0.750)
Source: Courtesy of www.GenesisFT.com.
08/16/05
63.2
63
62.8
62.6
62.4
62.2
62
61.861.67561.6
61.4
61.2
61
60.8
60.6
60.4
60.2
60
59.8
59.6
59.4
59.2
59
58.8
58.6
58.4
58.2
5857.8
For items 4 and 5, mark the two-day gap signal(s) and indicate thefollow-through including proﬁt target and trailing stop. Use your bestestimate of the actual prices.
4.
KC-200512:  Coffee Dec 2005 (Daily bars)
www.GenesisFT.com07/18/2005 = 104.55 (-5.30)
134
132
130
128
126
124
122
120
118
116
114
112
110
108
106
104.55104
102
100
06/06/05
06/20/05
07/05/05
Source: Courtesy of www.GenesisFT.com.
JWPR004-13
JWPR004-Bernstein
February 16, 2007
20:30
Char Count= 0
116
5.
30 DAYS TO MARKET MASTERY
S-200511:  Soybeans CBT (Pit) Nov 2005 (Daily bars)
Source: Courtesy of www.GenesisFT.com.
05/27/05
06/13/05
www.GenesisFT.com∧2)
06/24/2005 = 765
6 (+20
∧
770∧0765∧6760∧0
750∧0
740∧0
730∧0
720∧0
710∧0
700∧0
690∧0
680∧0
670∧0
660∧0
650∧0
640∧0
630∧0
620∧0
610∧0
JWPR004-14
JWPR004-Bernstein
February 9, 2007
17:15
Char Count= 0
L E S S O N 14, D A Y 14
Three PowerfulPrice Patterns:Part III
L esson 13 taught you the two-day gap trade pattern. The pattern you
will learn in this lesson revisits a method that you already know fromprevious lessons.
The basis of this pattern is the moving average channel (MAC). I willassume that you have learned the basic signals. You may want to review theMAC lessons if you have forgotten some of the rules.
PATTERN 3: THE CMC
Humor me for a few minutes while I test your recollection of history. Do youremember the Cuban Missile Crisis? If so, you will recall that this was a timeof considerable turmoil in relations between the Soviet Union, the UnitedStates, and Cuba. In fact, some historians now believe that we were closerto the brink of nuclear war than we have ever been. The crisis occurred in1962 between October 18 and 29. It was a result of a naval blockade imposedby then President Kennedy to embargo all ships seeking to enter Cubanwaters. The blockade was ordered in response to the shocking surveillanceevidence that Cuba, with Soviet assistance, had installed nuclear-armedmissiles, which were pointed at the United States.
Panic reigned supreme throughout the United States as the showdownunfolded. Many Americans retreated to their nuclear fallout shelters. Manyothers began building shelters, believing that war was imminent. The ﬁnan-cial markets were also unhappy. The Dow Jones industrial average, which
117
JWPR004-14
JWPR004-Bernstein
February 9, 2007
17:15
Char Count= 0
118
30 DAYS TO MARKET MASTERY
had already declined from a high of 734 in 1962 to a low of 524 in late June,began to drop again. The market dropped sharply on October 24.
While many investors panicked, savvy investors and traders were heavybuyers. They did so because they had evaluated the worst-case scenario.There were only several possibilities. First, the situation could stagnateand the stalemate could continue. This was unlikely due to the severityof the confrontation. Second, there could be a nuclear war. In this event,the United States would suffer severe causalities and damage. Dependingon how serious the conﬂict would become, there might even be a completecessation of stock trading. Finally, the third alternative was that the situationwould be resolved peacefully, in which case stocks would soar. Prescientinvestors bought stocks because they felt that in the event of a nuclear warwe would all be wiped out. There was every reason to buy stocks because thealternative was complete destruction. Those who bought on the bad newsfared extremely well. From the late October low, stocks began a three-yearbull market.
From this lesson of history