Overnight Volatility Gap Trade

Entry Logic

• Entry trigger: A significant gap up or down at the market open.
• Confirmation: The gap is accompanied by high volume.
• Timeframe: 5-minute or 15-minute chart.
• Location context: The gap is into a key support or resistance level.
• Market condition: High overnight volatility.

Exit Logic

• Profit target: A partial or full gap fill.
• Scaling out: Scale out as the gap is filled.
• Trailing stop: Trail the stop on the other side of a short-term moving average.
• Signal failure exit: The price continues to move in the direction of the gap.
• Opposite signal exit: A new gap in the opposite direction.
• Time expiration: Exit by the end of the day.
• Momentum loss: The momentum of the gap fill fades.

Stop Loss Structure

• Hard stop: Beyond the high or low of the opening range.
• Soft stop: If the price fails to move towards filling the gap.
• Max dollar loss: 1% of account capital.
• Max percent loss: 1% of account capital.
• Structural stop: Beyond the high/low of the opening candle.

Risk Management Framework

• Risk per trade: 0.5% of account capital.
• Daily limit: 2% of account capital.
• Weekly limit: 5% of account capital.
• Max drawdown: 15% of account capital.
• R:R requirement: Minimum 2:1 risk-reward ratio.

Position Sizing Model

• Sizing approach: Fixed fractional sizing.
• Volatility adjustment: The high volatility of the open requires a smaller position size.
• Conviction sizing: A+ setups get full size.
• Scaling in: Not recommended.
• Scaling out: Scale out as the gap is filled.

Trade Filtering

• Market conditions to avoid: Low-volatility opens.
• Specific setups required: A significant gap on high volume.
• Instruments: Stocks and ETFs that are sensitive to overnight news.
• Time restrictions: The trade is based on the market open.
• Chop/news avoidance: The gap is often caused by news.

Context Framework

• Trend direction: The trade can be either with or against the trend.
• VWAP relationship: The price will be far from VWAP at the open.
• MA relationship: The price will be far from its moving averages at the open.
• Range location: The gap is often out of the previous day's range.
• Higher TF alignment: Check the daily chart for context.

Trade Management Rules

• Breakeven: Move stop to breakeven after a 1R profit.
• Scale out: As the gap is filled.
• Add size: Not recommended.
• Fast vs slow moves: Expect a fast move at the open.

Time Rules

• Optimal window: The first hour of the trading day.
• Times to avoid: The rest of the day.
• Session notes: This strategy is specific to the market open.

Setup Classification

• A+ setup: A large gap into a key support or resistance level.
• A setup: A moderate gap.
• B setup: A small gap.
• C setup: No gap.

Market Selection Criteria

• Instruments: Stocks and ETFs that are sensitive to overnight news.
• Volume: High volume at the open.
• Volatility: The strategy is based on high overnight volatility.

Statistical Edge Metrics

• Win rate: 50-60%.
• Avg win: 2R.
• Avg loss: 1R.
• Profit factor: 1.7.
• Expectancy: 0.5R per trade.

Failure Conditions

• When strategy fails: When the gap is the start of a new trend and does not fill.
• Specific scenarios to avoid: Chasing the gap fill.

Psychological Rules

• Mental discipline: The ability to act quickly at the market open.
• Key mental discipline requirements: The discipline to take profits as the gap fills.

Advanced Components

• Regime detection: Not applicable.
• Filters: Not applicable.
• Correlation: Not applicable.
• MTF alignment: Not applicable.

Location

• Where strongest: In volatile markets with a lot of overnight news.
• Where weakest: In quiet, low-volatility markets.