After-Hours Gap Setup for Next Day

Entry Logic

• Entry trigger: A stock gaps up or down in the after-hours session and holds the gap into the close of the after-hours session.
• Confirmation: High volume in the after-hours session, and the stock closes near the high of the session for a long, or the low for a short.
• Timeframe: 60-minute chart for analysis, 15-minute for entry timing.
• Location context: The gap occurs after a period of consolidation on the daily chart.
• Market condition: A clear catalyst, such as earnings or news, is driving the gap.

Exit Logic

• Profit target: The next major daily support or resistance level.
• Scaling out: Not recommended; this is an overnight trade.
• Trailing stop: Not applicable.
• Signal failure exit: Exit if the stock opens the next day and immediately fills the gap.
• Opposite signal exit: Not applicable.
• Time expiration: Exit the trade within the first 30 minutes of the next regular trading session.
• Momentum loss: Not applicable.

Stop Loss Structure

• Hard stop: A gap fill on the open of the next trading day.
• Soft stop: Not applicable.
• Max dollar loss: $1200 per trade.
• Max percent loss: 2.4% of account capital.
• Structural stop: The midpoint of the after-hours trading range.

Risk Management Framework

• Risk per trade: 1.2% of account equity.
• Maximum daily loss limit: Not applicable (overnight trade).
• Maximum weekly loss limit: 6% of account equity.
• Maximum drawdown: 18% from peak equity.
• Risk-reward ratio: Minimum 2:1 required.

Position Sizing Model

• Sizing approach: Fixed fractional sizing.
• Volatility adjustment: Reduce size due to the overnight risk.
• Conviction sizing: Not applicable.
• Scaling in: Not recommended.
• Scaling out: Not recommended.

Trade Filtering

• Market conditions to avoid: A market with no clear direction or a high level of uncertainty.
• Specific setups required: A clean gap on high volume with a clear catalyst.
• Stock/instrument requirements: Stocks with a history of gapping and continuing in the same direction.
• Time of day restrictions: Enter the trade in the last 30 minutes of the after-hours session.
• Chop/news avoidance: Be aware of any news that could come out overnight and affect the trade.

Context Framework

• Trend direction: The gap should be in the direction of the daily chart trend.
• VWAP relationship: Not applicable.
• Moving average relationship: The 20-period and 50-period SMAs on the daily chart should support the direction of the gap.
• Range location: The gap should break the stock out of a multi-day range.
• Higher TF alignment: The weekly chart should show a clear path for the stock to move.

Trade Management Rules

• Breakeven: Not applicable.
• Scale out: Not applicable.
• Add size: Not applicable.
• Fast vs slow moves: Be prepared for a fast move at the open of the next trading day.

Time Rules

• Optimal window: Enter between 7:30 PM and 8:00 PM ET.
• Times to avoid: Entering too early in the after-hours session.
• Session notes: This is a high-risk strategy due to the overnight hold.

Setup Classification

• A+ criteria: A massive gap on huge volume with a major catalyst and a strong close.
• A criteria: A significant gap on high volume with a good catalyst and a decent close.
• B criteria: A smaller gap or lower volume.
• C criteria: Avoid all other setups.

Market Selection Criteria

• Instrument requirements: Stocks with a market cap over $5B.
• Volume/liquidity: Minimum 500k shares traded in the after-hours session.
• Volatility: High volatility is expected.

Statistical Edge Metrics

• Win rate: 50%.
• Avg win: 3R.
• Avg loss: 1R.
• Profit factor: 1.5.
• Expectancy: 0.5R per trade.

Failure Conditions

• The strategy fails when the gap is filled at the open of the next trading day.
• Avoid when there is a high level of uncertainty in the overall market.

Psychological Rules

• Be comfortable with holding trades overnight.
• Do not let the outcome of one trade affect your decision on the next.

Advanced Components

• Regime detection: Not applicable.
• Filters: Filter for stocks with a high short interest for gaps up.
• Correlation: Not applicable.
• MTF alignment: The weekly and monthly charts should support the direction of the trade.

Location

• Strongest: In stocks with a major catalyst and a clear institutional footprint.
• Weakest: In stocks with no clear reason for the gap.