Gap Trading Study Guide & Workbook: Ryan Prescott’s Plan

Quick Revision Sheet

Seven Sessions, With a Deliverable Each Time

Attempt each exercise before expanding its answer key. A session can take more than one day. Completing seven sessions does not establish competence for live trading or a source of regular income.

Introduction Companion: What Would Establish the Claim?

Learning objective: identify what a promised result would require as evidence. The introduction presents gap trading as a route to consistent profits. Treat that as a claim to investigate, not an outcome the workbook can promise.

A useful learning question is narrower: can two readers apply the same rules to the same past data and obtain the same candidate list? Only after definitions agree can a separate experiment investigate returns, losses, costs, and uncertainty.

Exercises 1–3

1. List five inputs needed to evaluate a claim of consistent profits.
2. Why does a selected chart showing a large rise not establish the average outcome?
3. Write one falsifiable claim about waiting beyond the gap day.

Chapter 1 Companion: Price Points Are Not Percentages

Learning objective: distinguish absolute changes, percentage changes, and reference levels. The chapter correctly draws attention to differences between successive sessions, but some numerical descriptions confuse points with percentages.

The denominator matters because the same one-point move is 5% of a $20 stock but 0.5% of a $200 stock. Keep the signed percentage when studying direction; use absolute magnitude only when that is the intended measure.

Three boundaries, three different observations

For our exercises, a full opening-gap fill means reaching the previous close within a fixed observation window. Reaching yesterday’s high is a different event. A wick can conceal whitespace without eliminating an opening gap. A regular-session opening gap also does not establish that there was no extended-hours trading.

Common, breakaway, runaway, and exhaustion labels mix location with interpretation. Record a candidate classification before later bars. Whether a move marked the middle or end of a trend is often retrospective; do not use the later label as if it were known at entry.

Exercises 4–8

4. Previous close $160, new open $164. Find the point and percentage changes.
5. Previous close $80, high $82; new open $84, low $81. Was there an outside opening, separated completed ranges, or full fill?
6. Previous close $50; new open $48, high $51. Find the signed gap and whether it filled under our definition.
7. Why can “today’s low remains above yesterday’s high” not be an opening-time eligibility rule?
8. Explain why an exhaustion label assigned after a reversal must not select a trade before the reversal.

Chapter 2 Companion: Read Psychology as an Explanation

Learning objective: distinguish observations from assertions about market participants. The chapter tells a story about eager buyers, professional selling, and prices that either reverse or persist. Those narratives can suggest questions, but daily OHLCV cannot identify who bought or why.

Positive news followed by a declining day is compatible with several explanations: expectations already embedded in price, a wider market reversal, changing liquidity, or other information. Choose measurements that could distinguish alternatives instead of treating one plausible story as established fact.

Exercises 9–11

9. Rewrite “professionals unloaded into amateurs” as an observation that could be recorded from daily data.
10. Give two explanations for a gap-up day that closes below its open.
11. What could a later high-break observation establish, and what could it not establish?

Chapter 3 Companion: Audit the Screen Before Using It

Learning objective: turn screening and later entry into a timeline. The book describes a roughly 3% opening gap, approximately three-times volume, no gap-day entry, and a later move one point above the gap-day high. It leaves several implementation choices open.

Make the decision timeline explicit

Our indicator compares gap-day volume with the mean of the previous 20 completed sessions, excluding the gap day. It interprets the screen as gap ≥3% and relative volume ≥3. These are our explicit choices, not proof of the linked site’s exact filters.

The one-point buffer is an absolute quoted-price amount. It is not necessarily one tick or one percent. State tick rounding, setup expiry, and what happens if a newer gap appears while an older one is still being watched.

Exercises 12–16

12. Previous close $200, previous high $204, new open $210. Calculate both reference-based gap percentages.
13. Gap-day volume 720,000; average earlier volume 180,000. Calculate relative volume. Could final session volume have been known at the open?
14. Gap-day high $72.40; buffer $1; tick size $0.05. What is the reference threshold?
15. The next session opens at $75. Can the $73.40 threshold be treated as an actual fill?
16. Write a policy for a second qualifying gap before the first setup triggers. Explain how it affects the sample.

Chapter 4 Companion: Separate Exit Rules From Guarantees

Learning objective: audit initial stops, warning-candle exits, trailing rules, fixed percentages, and partial realization. Each needs a reference, decision time, order behavior, and cost convention.

The SEC’s stop-order bulletin explains that a stop price is a trigger rather than a guaranteed execution price. A stop-limit adds a price restriction but may not execute. Verify the selected market’s broker and venue rules separately.

Size is a separate calculation

For ordinary shares in the account currency, a simplified planned quantity is cash price-risk budget divided by entry-to-stop distance, rounded down. Allow separately for costs, adverse fills, and an exposure cap. Product multipliers, currency conversion, and leverage require additional calculations.

Exercises 17–21

17. Entry $60, stop $58.50, cash price-risk budget $150: calculate whole shares and exposure before costs.
18. If maximum exposure is $3,000, what quantity and price-risk remain?
19. Buy 100 shares at $40, sell 50 at $44 and 50 at $38. Calculate total price profit/loss.
20. A trailing reference is $90 and a later completed candle proposes $88. Under a never-lower long-stop rule, what reference remains?
21. An example plans entry $100, stop $96, target $108. Actual entry is $102. What is actual price reward/risk if the other prices remain fixed?

Chapter 5 Companion: Define “Best” Without Seeing the Winner

Learning objective: turn resistance selection into a repeatable process. The chapter advises avoiding gaps into overhead resistance and favors gaps beyond a prior range. Record the boundary before the outcome.

One sentence describes opening and closing below resistance while surrounding text favors breaking above it. Treat that as unresolved wording, not a mechanical rule. For an experiment, specify the intended side explicitly. A repeated-touch zone also differs from a single highest-high calculation.

Exercises 22–24

22. Reference entry $92, stop $90, resistance $96. Express room to resistance in initial price-risk units.
23. Write a prior-data resistance rule and one limitation.
24. Why should two independent reviewers classify the same unseen charts before performance is discussed?

Chapter 6 Companion: Choose the Holding Policy in Advance

Learning objective: compare shorter exits, longer holding, and partial realization using one consistent record. The closing chapter illustrates how the same setup might support different holding choices. It does not establish that any one policy dominates for future trades.

A profitable rule violation is still a violation. A losing observation under a faithfully applied policy is not automatically a process mistake. Keep execution quality separate from monetary outcome, and distinguish changing the method from improving its execution.

Exercises 25–27

25. Buy 100 shares at $50; sell 50 at $55 and 50 at $65. Find blended exit and gross return on original capital.
26. Why is picking each past trade’s best exit policy after its outcome an invalid comparison?
27. Write one measurable paper-practice improvement that does not depend on the next trade winning.

Daily-Gap Indicator: See the Setup Without Simulating Trades

The indicator below turns selected concepts into chart observations. It uses indicator(), plots levels and markers, and offers optional alert conditions. It does not place orders, simulate fills, calculate strategy returns, or establish profitability.

A qualifying day is recorded only after its close. Subsequent bars can generate one threshold marker for that setup. On the last eligible bar, observation is checked before expiry; a new candidate may then be accepted at that day’s close only if no old threshold observation occurred. This changes the sample compared with retaining the newest gap or tracking every setup.

The stop-like line is labeled an invalidation reference. It uses the known gap-day low, not the entry day’s future low. The reward line is arithmetic from the threshold reference and a chosen distance multiple, not a target based on an actual fill. If a later bar spans both the threshold and invalidation reference, an amber ambiguity marker flags it without assigning a winning or losing sequence.

Use a standard one-day stock chart. Record session and corporate-action adjustment settings. No higher-timeframe requests or retrospective pivots are used. Pending levels are fixed; developing bars do not create signals. Historical signals use completed bars, while realtime alerts require creating an alert in TradingView. Select the named condition and use Once Per Bar Close; input changes require recreating the alert to reflect the new configuration. See TradingView’s alert documentation (paid link).

Validation status: static logic and HTML checks were performed, but this indicator has not been compiled in TradingView or tested on a live chart here. No signal counts, fills, returns, or performance statistics are claimed.

//@version=6
// CandleChasers original visual study tool. No orders, fills, or performance model.
indicator("CC Prescott Gap Study - Confirmed Daily Observations", overlay=true)
gapMin = input.float(3.0, "Minimum open-to-previous-close gap (%)", minval=0.0, step=0.5)
volumeLength = input.int(20, "Earlier completed volume sessions", minval=2)
volumeMin = input.float(3.0, "Minimum relative volume", minval=0.1, step=0.5)
buffer = input.float(1.0, "Buffer in quoted price units (not percent)", minval=0.0, step=0.05)
expiryBars = input.int(20, "Subsequent bars allowed", minval=1)
observationMode = input.string("Completed close", "Threshold observation", options=["Completed close", "Completed high"])
rewardMultiple = input.float(2.0, "Illustrative reward reference / distance", minval=0.1, step=0.5)
showReward = input.bool(true, "Show illustrative reward reference")

if barstate.isfirst
    if not chart.is_standard or not timeframe.isdaily or timeframe.multiplier != 1
        runtime.error("Use standard one-day candles.")
    if syminfo.type != "stock"
        runtime.error("This study tool is for stocks.")

priorVolume = ta.sma(volume, volumeLength)[1]
gapPercent = not na(close[1]) and close[1] > 0 ? 100 * (open - close[1]) / close[1] : na
relativeVolume = not na(priorVolume) and priorVolume > 0 ? volume / priorVolume : na
qualified = not na(gapPercent) and gapPercent >= gapMin and
     not na(relativeVolume) and relativeVolume >= volumeMin

var bool active = false
var int origin = na
var float threshold = na
var float lowReference = na
var float rewardReference = na
bool accepted = false
bool observed = false
bool ambiguous = false
bool expired = false
float visibleThreshold = na
float visibleLow = na
float visibleReward = na

if barstate.isconfirmed
    if active
        int age = bar_index - origin
        if age >= 1 and age <= expiryBars
            visibleThreshold := threshold
            visibleLow := lowReference
            visibleReward := rewardReference
            bool reached = observationMode == "Completed close" ? close >= threshold : high >= threshold
            if reached
                observed := true
                ambiguous := high >= threshold and low <= lowReference
                active := false
            else if age == expiryBars
                expired := true
                active := false
        else if age > expiryBars
            expired := true
            active := false
    // First-active retention. Never accept a second setup on an observation bar.
    if not active and not observed and qualified
        threshold := math.ceil((high + buffer) / syminfo.mintick) * syminfo.mintick
        threshold := math.max(threshold, high + syminfo.mintick)
        lowReference := math.floor((low - buffer) / syminfo.mintick) * syminfo.mintick
        rewardReference := threshold + rewardMultiple * (threshold - lowReference)
        origin := bar_index
        active := true
        accepted := true
        visibleThreshold := threshold
        visibleLow := lowReference
        visibleReward := rewardReference
else if active
    // Previously confirmed levels remain visible; developing bars create no signals.
    visibleThreshold := threshold
    visibleLow := lowReference
    visibleReward := rewardReference

plot(visibleThreshold, "Frozen threshold reference", color=color.teal, linewidth=2, style=plot.style_linebr)
plot(visibleLow, "Gap-day invalidation reference (not an order)", color=color.red, style=plot.style_linebr)
plot(showReward ? visibleReward : na, "Illustrative reward reference (not a fill target)", color=color.new(color.green, 35), style=plot.style_linebr)
plotshape(barstate.isconfirmed and qualified, title="Screen-qualified gap; may be ignored", style=shape.circle, location=location.belowbar, color=color.orange, size=size.tiny)
plotshape(accepted, title="Accepted active setup", style=shape.diamond, location=location.belowbar, color=color.teal, size=size.small)
plotshape(observed, title="Completed-bar threshold observation", style=shape.triangleup, location=location.abovebar, color=color.blue, size=size.small)
plotshape(ambiguous, title="Threshold and low reference spanned; sequence unknown", style=shape.xcross, location=location.abovebar, color=color.orange, size=size.small)
plotshape(expired, title="Setup expired without observation", style=shape.square, location=location.belowbar, color=color.gray, size=size.tiny)
plot(gapPercent, "Opening gap (%)", display=display.data_window)
plot(relativeVolume, "Relative volume", display=display.data_window)
alertcondition(accepted, "Accepted gap setup", "A completed daily gap setup was accepted. Visual reference only; no order is placed.")
alertcondition(observed, "Threshold observation", "A later completed bar reached the stored threshold under the chosen mode. This is not an order fill.")
alertcondition(ambiguous, "Dual-level ambiguity", "The threshold-observation bar also spanned the low reference. Intrabar event sequence is not established.")

What This Indicator Shows

Orange circles identify completed screen-qualified gaps, including candidates the active-setup policy may ignore. Teal diamonds mark accepted setups. A blue upward marker identifies a later completed-bar threshold observation. The fixed threshold, gap-low reference, and illustrative reward reference remain visible through the observation/expiry bar. An amber cross warns when a threshold-observation candle also spans the low reference.

What This Indicator Does Not Show

It does not verify the book’s chart histories, reconstruct investor intent, duplicate a third-party screener’s changing filters, track a portfolio watchlist, or implement any of the four exit families. There is no position state, broker connection, protective order, accounting model, or performance report. A marker’s appearance at the close does not imply an earlier entry was available.

Replay lab: compare one choice at a time

These are original manual-study comparisons. Record all observations and settings before judging outcomes. To study returns separately, first specify a realistic entry/exit/cost model; the indicator is not that model. Do not turn the largest later favorable price into a fictional profit.

Exercises 28–30

28. A later daily high reaches the threshold but its close falls below. Which observation mode marks it?
29. A bar spans both the threshold and low reference. What sequence is established by daily OHLC?
30. A newer qualifying gap appears while the old setup is active. Will both receive active levels?

Reusable Study Worksheets

A. Gap and screener audit

B. Ten-field setup specification

1. UniverseWhat instruments were eligible at that date?
2. Gap screenWhich prices, session, and threshold?
3. Volume screenWhich denominator and lookback?
4. ContextWhich resistance rule uses only earlier data?
5. ObservationTouch or completed-close confirmation?
6. TimingWhen is the decision made and order, if any, submitted?
7. Risk planWhich known reference, size, costs, and exposure cap?
8. Exit policyWhich predeclared full, partial, trailing, or time exit?
9. Conflict and expiryWhat happens to newer and older setups?
10. No-trade ruleWhat data or execution conditions disqualify the case?

C. Observation and optional paper-execution log

Keep observational fields separate from hypothetical accounting. If no paper trade was specified, write “not modeled” rather than entering zero profit.

D. Weekly review

Capstone: Build an Auditable Gap Study

1. Specify: complete the setup card and distinguish the source’s ideas from your added definitions.
2. Collect: inspect a preselected historical period chronologically. Aim initially for 30 screened events as a recordkeeping exercise, not statistical validation. Keep failed, ignored, and expired candidates.
3. Audit: reconstruct five cases, including a non-observation and any dual-level candle. Confirm that final daily information was not used before it existed.
4. Compare: change one indicator setting and record how the candidate set and observation timing differ.
5. Challenge: repeat frozen definitions on a later period or a separately chosen stock group. Disclose survivorship, missing delisted stocks, and sparse samples.
6. Report: write one page explaining the question, definitions, sample, observations, uncertainties, and next investigation. Do not describe marker counts as trading performance.

Completion rubric

Final Takeaway

The book’s later-breakout idea becomes more useful when its arithmetic, screening references, and decision times are explicit. Define the observation, keep the complete sample, and separate visual pattern study from a claim about money earned. The most useful next step is an honest replay record under one frozen specification.

Risk Disclosure

This material is for education and research, not personalized financial advice or a recommendation to trade. Gaps, halts, liquidity, fees, spreads, slippage, leverage, and market rules can materially change execution and losses. Stops do not guarantee a maximum loss. Indicators, chart examples, and paper observations do not establish future profitability or replace a complete trading and risk plan.

This is an independent educational companion to the book and is not affiliated with, sponsored by, endorsed by, or authorized by its author or publisher.