Pre-Market Gap Scanner Trade

Entry Logic

• Entry trigger: Stock gaps up or down over 3% on high pre-market volume (over 100k shares by 8:30 AM ET).
• Confirmation: Price holds above the 5-minute opening range high for a long, or below the low for a short.
• Timeframe: 5-minute chart for entry, 1-minute for refinement.
• Location context: Entry occurs above pre-market high for longs, below pre-market low for shorts.
• Market condition: High volatility, clear directional bias from the gap.

Exit Logic

• Profit target: 1R at the next key pre-market support/resistance level, 2R at the daily pivot.
• Scaling out: Scale out 50% at 1R, trail the rest.
• Trailing stop: Use the 9-period EMA on the 5-minute chart as a trailing stop.
• Signal failure exit: Exit if price closes back inside the opening range for 10 minutes.
• Opposite signal exit: Not applicable for this strategy.
• Time expiration: Exit position if targets are not hit by 11:30 AM ET.
• Momentum loss: Exit if volume dries up and price goes into a tight range for 15 minutes.

Stop Loss Structure

• Hard stop: 0.5% below the 5-minute opening range low for longs, 0.5% above for shorts.
• Soft stop: A 5-minute close below the opening range low for longs.
• Max dollar loss: $500 per trade.
• Max percent loss: 1% of account capital.
• Structural stop: Below the low of the opening range 5-minute candle.

Risk Management Framework

• Risk per trade: 0.5% of account equity.
• Maximum daily loss limit: 2% of account equity.
• Maximum weekly loss limit: 5% of account equity.
• Maximum drawdown: 15% from peak equity.
• Risk-reward ratio: Minimum 2:1 required.

Position Sizing Model

• Sizing approach: Fixed fractional sizing based on account risk.
• Volatility adjustment: Reduce size by 25% if the stock's ATR is 50% above its 10-day average.
• Conviction sizing: A+ setups get 100% size, A setups 75%, B setups 50%.
• Scaling in: Not recommended for this strategy.
• Scaling out: Scale out at 1R and 2R profit targets.

Trade Filtering

• Market conditions to avoid: Low-volume, choppy pre-market sessions.
• Specific setups required: Clean gap over a key pre-market level.
• Stock/instrument requirements: Stocks with a market cap over $2B and average daily volume over 1M shares.
• Time of day restrictions: Trade only within the first hour of the market open.
• Chop/news avoidance: Avoid stocks with major news events scheduled mid-day.

Context Framework

• Trend direction: Trade in the direction of the daily chart trend.
• VWAP relationship: For longs, price should be above VWAP. For shorts, below VWAP.
• Moving average relationship: Price should be above the 20-period SMA on the daily chart for longs.
• Range location: Gap should occur out of a multi-day consolidation range.
• Higher TF alignment: The 60-minute chart should show a clear trend in the direction of the trade.

Trade Management Rules

• Breakeven: Move stop to breakeven after a 1R move in your favor.
• Scale out: At pre-defined profit targets.
• Add size: Not applicable.
• Fast vs slow moves: On fast moves, take profits sooner. On slow grinds, let the trade work.

Time Rules

• Optimal window: 9:30 AM to 10:30 AM ET.
• Times to avoid: After 11:30 AM ET.
• Session notes: Strategy performs best on Mondays and Tuesdays.

Setup Classification

• A+ criteria: Clean gap, high volume, strong trend alignment, and a clear catalyst.
• A criteria: Clean gap, high volume, but mixed trend alignment.
• B criteria: Messy gap, lower volume.
• C criteria: Avoid all other setups.

Market Selection Criteria

• Instrument requirements: Mid to large-cap stocks.
• Volume/liquidity: Minimum 1M shares average daily volume.
• Volatility: ATR of at least $1.

Statistical Edge Metrics

• Win rate: 55%.
• Avg win: 2.5R.
• Avg loss: 1R.
• Profit factor: 1.37.
• Expectancy: 0.37R per trade.

Failure Conditions

• Strategy fails when the gap is immediately filled at the open.
• Avoid during broad market panic or extreme volatility.

Psychological Rules

• Do not chase entries if you miss the initial move.
• Stick to the plan regardless of emotions.

Advanced Components

• Regime detection: Use a market-wide volatility index like VIX to gauge fear and greed.
• Filters: Filter for stocks with high institutional ownership.
• Correlation: Avoid trading multiple correlated stocks in the same direction.
• MTF alignment: Ensure the daily and weekly charts support the trade direction.

Location

• Strongest: At the market open, in high-momentum markets.
• Weakest: In choppy, range-bound markets.