The Gap Guy

The following is the Daily "Gap Wrap" post I made last Thursday for members at MasterTheGap.com.  Just a little food for thought and self-promotion :)

Thursday's E-mini S&P Futures Gap Chart:

GAP:  down 12.75 pts

ZONE: U-3

ACTION:  long at open, 1/4 size, filled at 855.25

RESULT:  +12.0 pts ($600 per contract)

HEAT: 1.25 pts

TIME IN TRADE: 13 minutes

COMMENTS:  I was a little surprised and disappointed to see that there was no U-3 signal from Otis this morning. When I checked to see why, I realized that this opening gap met all of my criteria with flying colors except for one that it failed by only 1/2 point.  Further, my research showed that this particular signal has a great track record (>90%) early in the month. Plus, the gap was opening around potential support and above the "up" trend line of the past few days with a potential bottom being formed by the pre-market action.

Still, it was not a confirmed signal from Otis so I could not trade it with full size, and seasonality for down gaps this part of the month is somewhat weak.  So, I decided to trade it with 1/4 size.  Had this been a valid signal from Otis for this zone, he would have suggested a target above the gap fill area. But considering the size of the gap and the fact it was a discretionary play, I opted to stick with a target 1/4 pt in front of gap fill. 

It was a good discretionary trade as prices rallied right after the open just like yesterday. Unfortunately, I got a partial fill at my exit target and based upon price action and my "1 Point Rule," I didn't want to hang around and risk a reversal, so I simply closed the whole position with a market order. This resulted in my average profit per contract being 12.0 pts instead of 12.75. 

Of course, prices barely burped and continued their move up and through gap fill before temporarily reversing 1/4 point from Otis' target for the U-3 zone.  But prices recovered again, before stalling and ultimately dumping big time into the close.

Since I called out this trade in advance of the open and entered at the open, this will be considered a "Winner" for my tracking purposes (but a "miss" for Otis.) Otis has been well outperforming me of late due to my conservative position sizing, but today I got one on him.

One other note:  I haven't made a discretionary (i.e. non system generated) gap trade in about 2 months and certainly don't do it frequently.  But, on occasion, it does pay to understand all the nuances of your sytem and to make a calculated judgement when the odds are in your favor.