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 S&P 500 (25)

Tuesday
Sep292009

Results of Fading the Opening Gap in the ES since 1998

CommentPost a Comment DateTuesday, September 29, 2009 at 11:29PM AuthorGap Guy tagged , in

Greetings Gappers!

Been way too long since I last posted here on this site. Our member site has grown quite a bit and has kept me quite busy.

Per a Master The Gap member request, here's a video showing the historical gap fill results for fading opening gaps in the ES (E-mini S&P 500 futures) from 1/1/98 - 9/28/09.

The following video analysis assumes:
- all size gaps were faded (i.e. traded in the opposite direction of the gap e.g. down gaps were bought and up gaps were sold)
- at the opening price
- targeting gap fill (prior day close)
- using an end of day stop
- $5 commission per round trip trade

http://www.masterthegap.com/public/292.cfm

Note: this is not a recommended strategy of course, but interesting and hopefully helpful nonetheless.

Print ArticlePrint Article
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
Thursday
May212009

Gaps That Follow Doji Days (and other free research)

CommentPost a Comment DateThursday, May 21, 2009 at 2:28PM AuthorGap Guy tagged in

Last night's free Gap Trading Video at Master The Gap shows the historical odds for fading opening gaps that follow doji days in the S&P 500.  (Hint: they aren't good and it's one of the reasons I passed on trading's yesterday losing gap fade setup.)

You can view my daily "gap wrap" updates in the "Free Info & Updates" section of our home page at wwww.masterthegap.com.  

Alternatively, you can sign up for the free Daily Update emai, delivered nightly around 7-9 pm ET, via the drop down window on the home page.   Or, follow me at http://www.twitter.com/thegapguy . 

Scott

 

 

Print ArticlePrint Article
Wednesday
Apr292009

Brett Steenbarger's "40% of Range" Filter Explored

Comment3 Comments DateWednesday, April 29, 2009 at 4:37PM AuthorGap Guy tagged in

While trying to avoid the seduction of trading the market action after the FOMC statement today, I noticed a Twitter post from Brett Steenbarger.  In it, he mentioned his desire to update a November, 2006 blog post from his site entitled, "Do Opening Gaps Tend to Fill?"  After reading it, I thought it was worthy of crunching my own numbers.

One of the key findings of his research was that gaps up to 40% of the prior day's range (high to low) have a high probability of filling.  Those greater than 40% of the prior day's range only have a 50% probability of filling the same day. 

So, I cranked up ol' Otis (my gap fading system) and put him to work to test the gap fade win rates by size of gap relative to the prior day range (note: my system uses Average True Range which incorporates the opening gap into the day's range calculation).

The following shows the results of fading the opening gap of the E-mini S&P 500 futures, 1999 - 2008, targeting gap fill (prior day's close) and using an end of day stop:

Interestingly, the 40% threshold still appears to be the maximum size gap for reliably fading the opening.

Next, I tested all gaps up to 40% of the prior day ATR in size.  Here are the results, by year, through yesterday: (note: results are based upon trading 10 contracts)

Win rate dropped a little in 2006 and 2007, but appeared to get back on track (surprisingly) last year and thus far in 2009.  Finally, to make it more of a trading rule, I added a stop equal to 30% of the prior day's ATR to see if this simple 40% size filter could actually be worthy of trading:

As expected the win rates drop considerably with the addition of a fixed stop, but still they are quite solid. Profit factors are a little low for my likes, but they are quite good considering the simplicity of the concept.  And perhaps most noteworthy of all, the 40% rule appears to be holding up very well during the bear market of the past year and half.

Kudos and many thanks to Brett for this practical nugget that appears to work fairly well in all market conditions.  And be sure to check out his site, if you haven't.  I always seem to learn something helpful there.

(By the way, the 40% rule would have kept you away from fading today's losing gap fade in the ES. It was 8.75 pts in size and equal to 47% of yesterday's range. )

Print ArticlePrint Article
Wednesday
Apr222009

Gaps Following Trending Days To The Upside

CommentPost a Comment DateWednesday, April 22, 2009 at 3:58PM AuthorGap Guy tagged in

This morning, the MTG Probability Guides showed solid historical probabilities for fading today's large down gaps in each of the indices.  But there were some pattern risks and I was curious about yesterday's somewhat unusual trend day (i.e. the indices opened very near their lows and closed very near their highs).  In fact, the S&P 500 e-mini's open and closing prices (regular pit session hours) were within 5% of day's trading range from the low and high respectively - meeting my simple definition of a "trend day" to the upside.

I decided to back-test gaps that follow simple trend days up.  Based upon the results (shown below), I decided to fade the opening gap and captured a very nice 8.5 point winner (+$425 per contract).

 

Note: results shown are based upon fading 10 contracts, at the open, using a stop equal to 30% of the 5 day ATR and targeting gap fill, 1999 - 2009 (excludes today's winner).

For a more a detailed overview of this nicely profitable trade, check out my daily gap wrap video at www.masterthegap.com.

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
Saturday
Jan312009

Upside Island Setup is Now 9 for 9

Comments Off DateSaturday, January 31, 2009 at 11:47AM AuthorGap Guy tagged in

By my research, the S&P 500 futures have never generated an "island gap" to the upside in the past 10 years.  An island gap occurs when two gaps occur successively in opposing directions and each day's range does not trade within the prior days' range.  However, it did come very close on Thursday by trading up 3 points into Wednesday's trading range before rolling over and selling off the rest of the day. Though not technically an island gap, Wednesday's bullish Fed Day action and Thursday's dump left two unfilled gaps that were over 10 points in size - something else that has not happened in the past 10 years. See below:

Loosening the parameters a bit, there have been 8 times since 1999 in which two successive and opposite gaps failed to fill by 2 points or more.  (Since indices like the S&P are prone to filling, it is always noteworthy when it can't even come within 2 points of closing the gap.)  Following these unusual events, ALL of the next day's gaps filled the same day.  In fact, 7 of the 8 could have been successfully traded using just a 4 point stop.

But what about this pattern when the gaps simply fail to fill - regardless of by how much/little? Otis (my gap system) shows there have been 48 similar setups and 36 of them filled or finished profitably for a 75% win rate.  Interestingly, this pattern has occurred 14 times since 2007 with 12 of them resulting in winners.

With this unique pattern showing promising historical results and a signal from Otis showing that probabilities for a gap fill were very high (79%), I shorted Friday's small gap at the open.  Otis suggested an extended target i.e. below the prior day close, so after taking 3 points of heat, I scaled out for +4.5 pts and +8.25 pts.  Of course, it is a shame that I did not capture more of the sell-off, but it was nice calling it a day just 35 minutes after the open with some easy profits in the bank.

Print ArticlePrint Article
Tuesday
Jan202009

Stops Are Overrated

Comments Off DateTuesday, January 20, 2009 at 2:40PM AuthorGap Guy tagged in

Stops are critical of course, but for gap trading, stop size is overrated in my opinion. 

Why?  Consider the chart below that shows the historical win rate and profit factor for various size stops when fading the opening gap in the E-mini S&P 500 futures over the past 10 years. 

Often folks will tell me that they can't stomach the large stops that I use. My standard retort is that I can't stomach being stopped out a bunch of times in a row. Pick your poison.  In the grand scheme, making money trading gaps is not about picking the right size stop to use. It's about picking the right gaps to play.

Click here to see an interview of me discussing gaps and stops with Tim Bourquin, the co-founder of The Traders Expo and The Forex Trading Expo.

(BTW: if you are wondering whether I faded today's gap and got stopped - I did not.  It failed my system's criteria for an optimal gap fade in this normally high probability zone.  Plus, as I explained to members, historical seasonality for fading "down" gaps on this day of the month was (is) terrible: ~60% win rate when exiting at the end of the day.)

Print ArticlePrint Article
Page 1 2 3 Next 10 Entries ยป