Opening Gaps That Follow Doji Days
4 Comments Friday, March 27, 2009 at 3:36PM Gap Guy tagged Dow, Nasdaq 100, Russell 2000, S&P 500 in Patterns Howdy folks -
(Been a little a busy this past month with the New Yorker Traders Expo and the launch of my new, greatly improved member site - I'll try to get back to a more regular posting schedule.)
This past Wednesday the ES (E-Mini S&P 500 futures) formed a rare, perfect doji on the daily charts (i.e. the opening and closing prices were the same). The YM (mini Dow) also formed a doji candle, though not a perfect one. Further, the NQ (mini Nasdaq 100) and TF (mini Russell 2000) closed in opposing directions. The result? Somewhat intriguing but conflicting gap fill probabilities among the various indices for gap traders.
Check out this 8 minute video to learn about the risks and historical probabilities of fading gaps that follow doji days and why I passed on fading these juicy-looking opening gaps (a decision that ended up being spot on).
Be sure to sign up for the Daily Gap Update (via the drop down window on the home page of www.masterthegap.com) if you would like to get nightly links emailed to you for my daily gap wrap videos, and tips and seasonality probabilities for the next day's gaps.)
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Reader Comments (4)
Scott,
Thanks for your website and heads up on gap trades.
I am currently looking for one and only one gap trading set up for me. I want to trade gaps as my 3rd trading set up because it can work well before going to work in Arizona. I would need a complete set up with entry rule, exit rule, stop loss and any additional rule ("do not trade on Tuesdays" etc.) which can be set up in reasonable time before I go to work and then forget about the trade during the work day. DO you have such a set up and what would be the best way to aquire it from you? Would the book suffice for that?
Once I am convinced the set up works, I will trade it and never deviate it. The two other, unrelated strategies I use in the same fashion again and again. This is IMO what screws people up in the markets - they do not follow a plan with an edge and never deviate from it. To avoid deadly impulse trades I would indeed need the full set up.
Thanks!
Joe
Hi Joe,
Thanks for your question and kind words. I applaud the direction you are taking. Unfortunately, there is no easy answer since it is totally dependent upon your situation, goals and risk tolerance. The book will give you a great overview of how I trade gaps and ideas to incorporate into the creation of your own gap strategy, but there certainly is no gap signal per se that is detailed as you describe. In fact, any that you find published anywhere likely will not work or continue working for long.
My best advice would be to check out our daily probability service at MasterTheGap.com. Each night the historical probability and profit factors for targeting gap fill and extended target (beyond gap fill) using a specific size stop is posted - for one of 5 potential gap zones (specific price areas in which the index could open the following day). This info is currently provided for the 4 futures indices. The statistics are based upon entering at the open just I like do and leaving the trade alone until the target or stop is hit.
The only thing you would need to decide would be your criteria for trading a gap or not. I generally only trade if 3 of the 4 indices are showing similar historical win rates and profit factors. I also prefer to see a historical win rate of 60% (min) and a profit factor of 1.3 or more.
Here's a video that will help you understand what we do and what I am suggesting:
http://www.masterthegap.com/public/132.cfm
Good luck,
Scott
Scott,
Thanks for your prompt reply. May I ask how many gap trade you then take on average per month? - The reason I'm asking is that I would only want to trade one E-mine or Dow-mini as the gap trade. I'm not sure if enough potential profit is there after everything.
Joe
I take anywhere from 5 - 10 opening gap trades per month. Been averaging 6 or so per month this year, but I focus mostly on absolute returns and minimizing drawdowns, not on how often I trade. Good luck.
-Scott