In order to understand this setup you should first become familiar with the simple futures gap fade strategy described in the first day-trading setup. You will recall that gaps opening in certain specific zones relative to the prior day’s price action have higher probabilities for filling. When price gaps right outside the prior day’s price range into the zone above the highs of an up-day or below the lows of a down-day, then the probabilities of a futures price gap filling are reduced (though they remain above 50%). If, however, price begins to reverse after the open and moves back into the prior day’s range, then the probabilities of the gap closing completely from this point are raised.
It is this sort of reversal that our second futures trading strategy exploits.
Parameters for buys (rules are reversed for sells).
It is well worth taking a look at the Arms Index to see how it was behaving at the end of the previous session. If it was approaching an extreme low reading of around 0.6, or indeed has managed to do so pre-market (which is very unlikely), then this is a strong indication that the market may have become oversold, and there is a high probability that it will rally and create a winning trade with this setup. For shorting an overbought market that has produced an extreme gap upwards, look for an extreme high reading from the index of around 2.0.
It is this sort of reversal that our second futures trading strategy exploits.
Parameters for buys (rules are reversed for sells).
- Look for an extreme gap down in the ES (e-Mini S&P500 Future), well below the lows of a prior down day.
- Place a buy order with your futures broker at the prior day’s lows.
- Your target should be the level of the prior day’s close. Use a stop loss equal to your profit target, unless it is less than 40 points, in which case it should be one and a half times your profit target.
- If neither your stop nor your target has been hit by the end of the regular cash session, you should exit your position at the market.
It is well worth taking a look at the Arms Index to see how it was behaving at the end of the previous session. If it was approaching an extreme low reading of around 0.6, or indeed has managed to do so pre-market (which is very unlikely), then this is a strong indication that the market may have become oversold, and there is a high probability that it will rally and create a winning trade with this setup. For shorting an overbought market that has produced an extreme gap upwards, look for an extreme high reading from the index of around 2.0.