I haven't talked about a gap-up trade in quite some time - mostly because I prefer the counter trade (I like the stock to know where it's going). But I was doing some practice earlier and ran across this beauty and thought I'd take a minute and share it with you.
This is the classic gap-up return to 4 that Trader X invented and then chose to share with everyone for free quite awhile ago (actually X uses the MA 5 but I've modified it to an EMA 4 - same effect - I just prefer the EMA).
There are multiple theories as to where to take this trade and when to end it. If you go to X's site you will get his version which is extremely good and very safe. If you stay here you'll get my version which might or might not appeal to you but it will be a little different.
I have three theories of entry as shown on the chart. When given this type of set-up I will always take entry 1 at the EMA 4. The little dummy spot in the fifth candle position helps make the determination in this example. A more conservative approach will be to wait for entry point 2 and the most conservative, highest probability approach is to wait for entry point 3.
The box drawn above the entry possibilities is labeled "Echo" - that is an echo effect that you get many times. It is actually the stock pulling back in to the EMA 8 which is the reason why I keep the 8 on the chart. If the stock closes below the EMA 8 it is probably done going up (not necessarily but probably). If not I will hold it for a bit more and let the candlesticks determine the selling point. In this example that would have been at 2:15 because the large candle coupled with elevated volume generally signals an end to the run. The following two candles push me out if I didn't get the first memo.
Trader X uses Fibonacci lines to determine his exit point and you probably will want to read up on those as well. Once more a personal preference but I'm more comfortable reading the sticks.