One of the world’s most celebrated mapmakers, Ptolemy was prone to a contagious vice: Making it up as he went.
This led to one of his most famous ‘miscalculations’: the longitudinal position of the Far East, suggesting to Columbus that he could reach Japan by sailing directly west from Europe.
Imagine the fallout had Columbus actually used this map for his voyage.
99% of retail traders are also making it up as they go — whether they admit it or not. Ignoring price gaps at market open can put you in a similar class — leaving you unable to accurately map trading profits.
Price gaps at market open: Your best marker for sentiment
For some cartographers, a blank space was a liability, not an opportunity, for exploration.
For your chart, a blank space, or gap, between opening and closing prices is a gift, not a burden. In an instant you have an indication of strength, weakness and sentiment.
Opening price gaps are the strongest indicators of the prevailing sentiment and its potency. If you see a price gap at market open that’s:
• Above the previous close, or even the prior high, you’ll know that sentiment is strong.
• Below the previous close or low, things are not looking that good and you’re likely dealing with weakness.
Logically, your day’s trading strategy should start with understanding the sentiment of the market. Doing so will position you to trade with prevailing sentiment and the trend that’s likely to follow.
Taking the guesswork out of reading gaps at market open
Ptolemy’s view of the world was skewed, causing his maps to be comically inaccurate by today’s informed standards.
You can avoid this same trap easily by putting price gaps in the context of the prior day’s open and high. Doing this gives you a collective set of markers pointing towards high probability trades.
Using these markers, see how the gaps ultimately played out over three days in our ES example below. In the context of the prior day, you would have seen:
• Day 1: Price opens above the prior high (green line) and the prior close (pink line) – so sentiment is looking very bullish – which is what played out.
• Day 2: There’s a gap above the close, but not above the prior high – so we’re still looking up, but as it turned out we grinded a bit.
• Day 3: We gapped above both the high and the close, and although we grinded, we continued upwards.
As price played out each day, you can see that it mostly stayed consistent with the sentiment signaled in the opening gap.
Automated coordinates guide you to high probability entries
Ptolemy’s maps did have a feature worth emulating: coordinates that plotted cities and important regions. This made them easy to read at a glance — a practice well ahead of his time.
Accurate starting coordinates are a critical component in preparing any day trading strategy. Manually plotting these coordinates on a chart is an activity that can be time-consuming and prone to error. Avoid this trap simply by having coordinates plotted for you — allowing you to focus on analyzing the price and your plan.
Are your ‘proven methods’ sabotaging your profits?
Ptolemy was lauded for his ‘sound’ principles. With the same logic, your ‘proven’ approach will lead to a search for profits that aren’t there.
As with any market open, the forces of volume will be fighting to control sentiment. This may result in initial swings and extremes that cause you to question your initial evaluation — reverting back to your ‘trusted’ methods.
Look at Day 1 of our example and ask yourself: Had you not made this evaluation, would you have panicked when price dropped with the second candle?
If so, you would have been reacting instead — likely trying to assess as you went along — which would have been costly.
Remember that you have the relative safety net of fair value as your overriding guide. Know that price will likely be reeled back in by institutional traders interested in supporting the zone you’ve been working with.
Start your trading day with profit — instead of guesses
Fantastical representations plague explorers to this day, regardless of advances in mapmaking, let alone GPS. Even though they present themselves at the start of each day, price gaps are often ignored.
Unlike the lack of information Ptolemy dealt with, you have the benefit of accurate data with each market open. These details put you in a position to benchmark price and exploit gaps that regularly present themselves.
Use these gaps as clear signals of sentiment driving price strength or weakness. Plot them in the context of previous highs and closes to evaluate the current market and likely trend.
Map your daily trading strategy using these markers for high probability positions and consistent profits. Learn from Ptolemy while everyone else makes it up.
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