*** Learn more about probability-based ‘quant’ trading at www.investiquant.com ***
ATR: Average True Range. ATR is calculated by measuring the distance between the extreme high and low of a day, including the prior closing price (if it is beyond the day’s trading range). By incorporating the prior day close, a more accurate measurement of a market’s daily movement can be determined since the overnight gaps are included. ATR is a useful calculation for measuring the volatility of a market.
BLUD Gap: “Below Low of Up Day.” As the name implies, it is generally a difficult zone in which to play gaps since it is the only zone without a strong natural bias to fill.
Buffalo Trade: This is a trade where price action almost hits the target, then reverses and becomes a loser. Or, this is a trade that goes against me and stops me out, just before turning into a winner. The key to remember is that any trade with the word “Buffalo” in its description, is always a frustrating loser. (My apologies to Buffalo fans!)
Breakaway Gaps: These gaps occur after a period of price consolidation. They are caused by a surge of demand to buy or sell the market, typically in response to a significant event. The gaps are not filled during the same trading day (often not for many days or weeks) and are associated with above average volume.
Common Gaps: These gaps occur throughout a market’s typical ebb and flow in response to a wide variety of events and news. They are often associated with average or below average volume and generally fill the same day.
Continuation (or Runaway) Gaps: These gaps occur during, and in the direction of, an ongoing trend and are generally viewed as confirmation of a trend’s strength. They are associated with above average volume and often do not fill the same day.
Cowboy Gap: These are gaps that open “up” but below the daily low of 2 days prior AND between the open and close (the candle body) of a prior down day (red candle). This generally high probability gap fade setup is akin to a “dead cat bounce” and occurs within D-OC zone shown in the daily Gap Guides at MasterTheGap.com. It works well because the two day pattern is bearish. I call it the Cowboy gap trade because you need to ride it like a “bucking bronco” since it is prone to bouncing around (rallying) quite a bit after the opening bell before it fills the gap. I will sometimes use a slightly larger stop on these setups to accomodate this volatility. There is a presentation that I did for SFO magazine on this setup at their website and in the members download area of MasterTheGap.com. The reverse or sister setup is the Heat Gap – see below.
Exhaustion Gaps: These gaps occur at or very near the end of a trend. They are typically associated with very high volume as the very last buyers (or sellers if the asset is in a downtrend) jump aboard a trend that is ending and are overrun by opposing market forces as prices stall and often reverse sharply that day.
Extended Target: This term refers to the placement of an exit price for a gap trade that is beyond or through the gap fill area (prior close). It is often quite profitable to trade gaps using an extended target if your research supports the probability of price continuation.
Fade: This term simply means to enter a trade in the opposite direction of the gap move. For example, to fade an “up” gap, I would “sell” a.k.a “go short.” To fade a “down” gap, I would “buy” a.k.a. “go long.”
Fibonacci Numbers: a series of numbers often used by traders to calculate potential retracement or extension levels of a price move. These mathematical expressions were first described by Leonardo of Pisa (also known as Fibonacci) around 1200 A.D. to predict the number of pairs of rabbits that would be born “n” months after a single pair begins breeding (assuming newly born bunnies begin breeding when they are two months old). Fibonacci numbers are found throughout nature including the spirals of galaxies, crystal structures, and the nautilus shell. (For you geeks the sequence is simply the addition of the two preceding numbers: 0,1,1,2,3,5,8,13,21,34,55,89,144,233,377,610,987, etc. Note: each number is 1.618 times bigger than its predecessor.)
Futures Contract: A standardized financial obligation for a buyer to purchase an asset (or the seller to sell an asset), such as a financial instrument or physical commodity at a pre-set future date and price. Futures are used to hedge or speculate on the price movement of an asset. While a futures contract does obligate the trader; in real life, this obligation is avoided by simply exiting the position, much like selling a stock in the equity markets would close a trade.
Gap: The most common definition of a “gap” is the difference between an asset or instrument’s opening price and its prior day closing price. This difference shows up visually on a technical price chart as an open space or “gap.” (Note: some traders define a gap as the difference between the prior day high or low and the next day’s opening price.)
Gap Down / Down Gap: An opening price that is below the prior day closing price.
Gap Up / Up Gap: An opening price that is above the prior day closing price.
Gap Fill / Close: When prices pull back from the open of a session and retrace all the way back to the prior session’s closing price, the opening gap is considered to have “filled” or “closed.”
Gap-n-Go / Go With: This is a trade where you “go with” the gap by trading at the open in the direction of the gap (as opposed to fading it.) Gaps into some zones increase the likelihood of a continuation or breakaway gap and therefore are less likely to fill and may be candidates for “going with” the gap.
Gapper: A unique individual that has evolved beyond his/her trading peers by recognizing the superior return on time, effort and capital of the “gap fade.” This elite trader can be recognized by his/her enviable lifestyle and finances!
Gap Zones: The areas defined by the prior day’s Open, High, Low and Close. By including the prior day’s direction (open to close), gap zones can be extremely useful for segmenting, analyzing and trading opening gaps. Click here to view the Gap Zone Map for the S&P 500 (and historical gap fade win rates) for the past 10 years.
Go Long: This is when you buy a security in anticipation of being able to sell it later at a higher price for a profit.
Heat: This is a slang term for “maximum adverse excursion” which describes how far (points) a trade moved away from my desired direction before becoming a winner. This is a good statistic to track for all trades.
Heat Gap: These are gaps that open “down” but above the daily high of 2 days prior AND between the open and close (the candle body) of a prior up day (green candle). This generally high probability gap fade setup occurs within U-CO zone shown in the daily Gap Guides at MasterTheGap.com and works well because the two day pattern is bullish in nature. I call it the Heat gap trade because it is prone to bouncing around quite a bit (i.e. selling off some) after the opening bell before it fills the gap. I will sometimes use a slightly larger stop on these setups to accomodate this volatility. The reverse/sister setup is the Cowboy Gap – see above.
Mini / E-Mini: An electronically traded futures contract that is equal to only a small portion of a normal futures contract. E-minis contracts are available on many indices such as the S&P 500, Dow, NASDAQ 100, and Russell 2000, as well as commodities such as oil and gold Trading E-mini contracts has many advantages for individuals, including high liquidity, low cost, and nearly 24 hour trading.
Otis: “Otis” is the name of my gap trading system. I named it after my late, great-grandfather Otis Shepard of Farmville, Virginia. Papa Shepard was a hard working, unassuming, rock-steady entrepreneur who was loved by all that knew him. When he died, he left me his wedding band which I still wear everyday (inscribed with his and my great-grandmother Pearl’s initials and their wedding date: 12-20-1917) and his blue blazer that fits me perfectly and that I often wear to church. Pretty cool.
Profit Expectancy / Expected Value (EV): In lay terms, it simply how much profit per trade one would expect to average over time (based upon historical averages) for a given set-up. The formula: (average profit per winner * probability of winning) – (average loss per loser * probability of losing). This is also known as EV or “expected value.” Note: this number is far more important than just the probability of profits. It may feel good to have a high winning percentage, but it may not be profitable over the long term.
Profit Factor (PF): This is another way to measure the attractiveness of a trade set-up. It is the historical net profits of a strategy (generated by the winning trades) divided by the historical net losses of the losers. A profit factor greater than 1.0 would be a money making strategy and less than 1.0 would be a losing strategy. The bigger the profit factor, the greater its long term profitability and attractiveness.
Regular/ Pit Session: This term is synonymous with the “open outcry” or pit session hours for a given market, e.g. 9:30 – 16:15 EST for the S&P 500. Many markets trade nearly 24 hours a day electronically; however, the bulk of volume is transacted during their “regular” trading hours. For this reason, the regular session’s open, high, low, and closing prices carry great significance for most traders and their systems.
Short: This is when you sell a security with the anticipation of being able to buy it back at a lower price for a profit.
TICK: Represents the number of stocks ticking up minus the number of stocks ticking down on the NYSE, it can be used as a barometer for the overall U.S. equity markets for day trading.
TRIN: a.k.a. Arms Index (developed by Richard Arms) = [(Advancing issues/declining issues) / (advancing volume/declining volume)]. This number generally moves inversely to the market i.e. rising Trin is bearish and vice versa. The trend of the TRIN is often more useful than its absolute level when used for day-trading.
Win Rate: This term describe the percentage of trades for a given setup that hit their target or could have been exited at the end of the day for a profit.
Zone: An area of prices between support and resistance levels such as the prior day Open, High, Low, & Close. I use zones as the foundation of my gap strategy to segment and analyze historical patterns. Gap zones work well for analyzing gap setups because they inherently incorporate: support and resistance, short term trend, gap size, & trader psychology. Click here to see my Gap Zone Map.
*** Learn more about probability-based ‘quant’ trading at www.investiquant.com ***