Welcome Gappers!

My name is Scott Andrews and I trade the opening gap. This site is a repository for my gap trading ideas and research.  Feel free to browse and contribute to the discussions.

Twitter

Quotes
Quote and Chart Search

You can search for stocks, futures,
and forex by symbol or name.
Subscribe for Free

Enter your email address to receive blog posts by email:

Concerned about privacy?

Email delivered by FeedBurner

Blogroll
Search

Blog Archives

Entries in Dow (5)

Friday
Jun192009

Gaps Following Three Higher Lows

Comment4 Comments DateFriday, June 19, 2009 at 4:52PM AuthorGap Guy tagged , , , in

Here's some research (from my Los Angeles Traders Expo presentation) showing a nifty little pattern to remember next time it appears.  It assumes you faded the opening gap and closed it out at gap fill (prior day close) or exited at end of the day.

Note: three "higher highs" give comparable results, but the three "higher lows" is a slightly better indicator in my opinion.

I think the slide says it all - good gapping!

 

Print ArticlePrint Article
Friday
Mar272009

Opening Gaps That Follow Doji Days

Comment4 Comments DateFriday, March 27, 2009 at 3:36PM AuthorGap Guy tagged , , , in

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.)

Print ArticlePrint Article
Wednesday
Feb252009

The Crazy Game of Risk & Return (when gappin')

Comment4 Comments DateWednesday, February 25, 2009 at 10:07PM AuthorGap Guy tagged , , , in , , ,

This morning's gaps in the indices were all in my "U-CO" zone (i.e. prior day was Up, and gap was below the prior day Close and above the prior Open. See Gap Zone Map.)

The new Probability Guides (at our new site) showed that today's gap setups for the ES, NQ and YM had strong historical win rates and profit factors when targeting the gap fill by going long at the open using a stop equal to 30% of the 5 day ATR. Plus, seasonality favored the longs today.

As such, as I shared pre-market with members, I planned to buy the open with a half size position in the ES, 8 pt stop and target 1/2 pt in front of gap fill. The requirement was that price be trading below 766.5 at the open so that I would have at least 2 points ($100 / contract) of profit opportunity.

Using TradeStation's time activated order functionality I set up my order with these parameters. The ES opened precisely at 766.5, but then traded below that price almost instantly, resulting in me getting filled at 766.5.  Argh. I didn't particularly like the setup, but couldn't deny the historical probabilities.  So, there I was filled with 1.75 pts of opportunity and an 8 pt stop (30% of the 5 day ATR).

Fortunately for me, the probabilities worked in my favor, and I was filled for a 1.75 point profit ($87.50 per contract) just minutes after the opening bell for my 2nd small winner in as many days and my 4th winner out of 5 opening gap trades this month.

Several folks told me in the Trading Room today that they have a hard time risking 8 points to only make 2 points. To be clear, it's not my favorite thing to do either. But for today, the Probability Guide showed a 78% historical win rate for gaps in this particular zone. That is the WEIGHTED average for all size gaps historically in this area. So, you know that the small gaps must have an even higher historical win rate and the larger gaps must have a slightly lower win rate.

Here's the math: Since all size gaps in this zone average a 78% win rate, let's assume that 2 point gaps have an 85% historical win rate (consistent with the average for small gaps in all zones). Out of every 20 trades, you would expect to have 17 x 2 pts of profit for 34 total pts. And you would expect to have 3 x 8 pts of losses for -24 pts. So over the course of 20 trades you would expect to make a net of about 10 pts (34-24), or about 1/2 pt (+$25) of profit per contract per trade.  I've done this exact trade many, many times over the years and though it is not the most profitable of setups, they do add up over time.

Print ArticlePrint Article
Friday
Feb062009

Gaps on the Day of the Monthly Jobs Report

Comments Off DateFriday, February 6, 2009 at 10:42AM AuthorGap Guy tagged , , , in

On the first Friday of every month, the U.S. government releases its various employment metrics that include: non-farm payrolls, the unemployment report, average workweek, and average hourly earnings.  Collectively, these reports are often called the "Jobs Report."

These labor market indicators are followed closely because they generally indicate the health of the U.S. economy and whether it is expanding or contracting.  In simple terms, a decline in employment generally portends a slowing in consumer spending and vice versa.  For more info, check out this page on Investopedia.com.

I normally don't pay much attention to the news and various economic reports when playing gaps, but this report is the exception.  Today was a great example of "why."  At the open there was a reasonable and inviting gap "up" in the S&P 500 (about 4 pts).  In fact, it opened in the single highest probability zone for gap fading:  just beneath the high and above the close of a prior "up" day, which has an 82% historical gap fill win rate.

But I didn't fade it, because my research shows that fading "up" gaps on the day of the Jobs report has historically been a money losing setup.   Below is the summary of doing so from 1998 - 2007 when using an "end of the day" stop. Note how the win rate (65%) is below historical averages (~72%) for fading opening gaps in the S&P and how, even when using "no stop," it did not make any money as evidenced by the profit factor of .87:

 

Taking the research a step further and assuming one used a 6 pt stop, showed  the following:

> fading "up" gaps and using a 6 pt stop:  56% win rate (39/69) and PF = .96

> fading "down" gaps (i.e. going long) using a 6 pt stop: 63% win rate (22/35) and PF of 1.99.

I also added a filter to see if the prior day's direction made a difference and the only improvement was shown by only buying down gaps on the day of the Jobs report after a down day: 71% (10/14) and PF of 3.5.  This is a small sample size, but it is certainly worth considering.

So the next time there is a gap up on the day of the jobs report, you might want to think about trading in the direction of the gap - today it would have served you well (see below). Or better yet, you might just want to call it a day and start your weekend early!

Print ArticlePrint Article
Monday
Nov242008

The "Mood" of the Market Matters (but not how you might think)

Comments Off DateMonday, November 24, 2008 at 3:32PM AuthorGap Guy tagged , , , in

The past two weeks have been a blur with the release of Otis 4.5 (latest version of my gap trading system) and my various presentations at the Las Vegas Traders Expo - which ended this past weekend.  I do plan to post at least once or twice on most weeks, so you may want to subscribe (on the right nav bar) to receive email delivery of my blog posts and avoid having to check the site for updates.

This morning's gap was above Friday's high price. As I explained to members at www.masterthegap.com, "Otis is suggesting a discretionary "long" signal (i.e. "go with" play). I will wait until after the open to evaluate market internals..."   The signal was "discretionary" since the sample size for this particular pattern was smaller that I am willing to trade with normal position size. Even so, I knew that I needed to be looking long and not to consider a short / fade of this inviting-looking opening gap.

One of the concepts I discussed in Vegas was the importance of knowing the market's "mood." Contrary to what many traders think, shorting "up" gaps during down/bear markets can be quite risky. Even thought one might think fading counter-trend gaps might be a good strategy, in reality, it is not.  Check out the following:

Note how shorting "up" gaps (targeting gap fill and using an end-of-day stop) when prices are below the 200 daily MA shows the lowest of all historical win rates (data is from the e-mini S&P, 1998-2008). This setup also shows the lowest profit factor, meaning that the ratio of profits to losses is not only negative, but it is the lowest of all 4 scenarios.  Why? Because "up" gaps during weak and oversold markets will often become trend days as shorts are forced to cover and bargain buyers step in.

In case you missed it, I have an article published in the December (currently available) issue of Active Trader magazine. It also shows the value of knowing the market's "mood" (by using daily moving averages) when using gap zones. The QQQQs are used as an illustration.  Active Trader is available at most major book stores, or you can check out the electronic version at their web site:

http://www.activetradermag.com/

Below is a 5 minute chart that shows today's trading action for the E-mini S&P 500. It was a good call by Otis to not fade this one. (white = today's open, blue = prior close, green = prior high, red = prior low, purple = 600 SMA).

 

Print ArticlePrint Article