QQQQ Gap Trade

Trading really is all about pattern recognition. In my opinion as a trader it's not important to know why stocks move the way they do, we don't get paid for that. We get paid to recognize and trade patterns that repeat over and over again. The only people that need to know why a stock moved higher or lower are the reporters who explain after the fact why something moved. Listen only to what the market has to say because that's who is going to pay you.

If you day trade the market, here is a nice pattern that has been working fairly well recently. When the nasdaq (QQQQ) gaps above or below the previous day's high/low, there is a tendancy for the nasdaq to revert back to the unchanged level from the previous day. Sometimes the QQQQ will keep going through the unchanged level and other times it will turn around and head back in the other direction. The point I am trying to make is at the very least you will get a move back to the previous day's close.

If you look above you will see a 2 1/2 month daily QQQQ chart. For those of you who don't understand candlestick charts, let me make this simple by saying if the candle is black that means the close was BELOW the open...if the candle is white that means the close is ABOVE the open.

The green arrows show the days where QQQQ gapped below the previous day's low. The red arrows show days where QQQQ gapped above the previous day's high. The small horizontal red line shows the close from the previous day. There are 9 signals on this chart..every one of the gaps returned to the previous day's close.

For example: On November 28th, QQQQ gapped down below the prior day's low and rallied to the previous day's close.. On that particular day it actually went much higher than the prior day's close.

So how do I trade this pattern?...Well if the market gaps below the previous day's low I'd be looking to buy with a high probablity of a rally to at least the previous day's close. If we gap above the previous day's high, I will look to do the opposite and short the QQQQ sometime in the morning.

Patterns come and go (much like traders) but when you see a pattern that is working over and over again, you have to take advantage of it. You are not going to get rich off this pattern, all it does is provide us with a small advantage or an edge. At some point I'm sure this pattern will not work as well as it is now which is why you must always use stops. You can use a time stop, a volatility stop..I'll let you figure that one out..