The Gap Guy

Today was my last gap trade & call for 2008.  It is not because I have had a very good month (5 winners and 1 loss), though that certainly makes it easier.  Nor, is it because I will be travelling with my family.  Those that follow me closely, know that I have no problem trading gaps from anywhere (airports, golf courses, gas stations, etc.) or anytime (vacationing at the beach, etc.). 

As a general rule of thumb, I trade gaps and my signals year around, EXCEPT for the period between Christmas and New Year's. The reason, as I explained to Master The Gap members, is twofold:  I like to take a break to relax, reflect and prepare for the new year; AND volume tends to run quite a bit lighter and gap fades are often more unpredictable. 

Wanting to update my research for this holiday period and provide some historical data for those that want to trade over the coming week or so, I back tested the E-mini S&P 500 gap fade, targeting gap fill, and exiting at EOD (end of day) if the gap did not fill.  Here are the results from 1998 - 2007:

Observations:  

1) Going long (i.e. buying down gaps) appears to be riskier with below historical average results (though the sample size is a little small to draw a definitive conclusion).

2) Shorting "up" gaps appears to present a slight edge with almost 77% win rate (note: this assumes no stop was used! Using a stop will diminish the win rate).

3) In total, the win rate for fading both up and down gaps is about 71% - consistent with long term averages.  However, the above does not discuss profit expectancy which is significantly more important than win rates. So, be sure to consider your stop size and the profit opportunity before trading any gaps over the holidays.   Nothing is worse than being "right" the majority of the time and NOT making any money (a phenomenon that occurs more than most traders like to admit).

Merry Christmas and Happy Holidays to all!