Building a GAP Trading Strategy

[brownsfan019]

Originally Posted by BlowFish I think you ordered the AL Brooks book Brown? (I did too). In his presentations he talks about gaps, he is neutral on direction until price action dictates it. however his observation is that gaps frequently result in trend days (one direction or the other).

BF - thanks for sharing that as haven't read anything this week w/ some illness I'm fighting.

If you can expand more, please do. Curious to hear what he has to say on gaps.

[BlowFish]

The book didn't arrive in time for my weekend away, however the free info (linked in the other thread) has a wealth of information. I don't know why but I thought you had ordered the book too?

He pretty much does what you have mentioned and that is look for strength or weakness in the first couple of bars/candles after the gap. He doesn't make any assumption on direction (fill or further move in the gap direction) but his observation is that gaps often lead to strong trends so he gets ready for that eventuality.

[dancorcal]

Hi Guys,

I found this somewhere, and thought it could be useful. It states the half gap fill is 80% winner. Of course you will still need correct money management (i.e. position size, stop loss) to make it profitable. Keep the ideas coming.

[brownsfan019]

If you can assume an 80% win rate, then this has very strong potential. Cutting losses is key.

[brownsfan019]

Originally Posted by BlowFish The book didn't arrive in time for my weekend away, however the free info (linked in the other thread) has a wealth of information. I don't know why but I thought you had ordered the book too? He pretty much does what you have mentioned and that is look for strength or weakness in the first couple of bars/candles after the gap. He doesn't make any assumption on direction (fill or further move in the gap direction) but his observation is that gaps often lead to strong trends so he gets ready for that eventuality.

BF - I got it, but haven't opened it yet. Was planning to until I got hit w/ some bug that just shut me down for a good part of the week.

[DaveDM]

I wrote some code awhile back for TradeStation as a starting point to a gap strategy, I'll post it here. If you run backtesting on it you'll soon realize that it doesn't make sense to risk real money trading it. However -- I haven't given up on it yet. I'm thinking about ways to filter out the entries so that you enter the trade under ideal conditions.

Those conditions could include using some type of trend determination filter such as Heikin Ashi, Momentum, Buying/Selling pressure etc.

If / when I come up with a decent solution I'll be happy to post the conclusion. In the meantime, feel free to play with the code if it helps.

DaveDM

----- Place the following in two separate Strategy documents in EasyLanguage, one for Gap Up and one for Gap Down...


// Gap Up Strategy

inputs:
Percent_Fill(.75), // 1 = 100%
Min_Gap_Size_Points(20), // 1 = 1 YM point
Max_Gap_Size_Points(101), // 1 = 1 YM point
Total_Contracts(1),
Take_Position_Start(935),
Exit_Positions_Time(1550) ,
Risk_Reward_Ratio(1.00);

variables:

mp(0),
Trade_Count(0),
Min_Gap_Per_Short(0),
Max_Gap_Per_Short(0),
Min_Short_Entry(0),
Max_Short_Entry(0),
Target_Short(0),
P_Close(0),
P_Open(0),
Gap_Size(0),
Stop_Price(0);

mp = marketposition;


// Gap Open, Direction Short

If time = Take_Position_Start then begin
if Trade_Count < 1 then begin
P_Close = CloseD(1);
// find bar number to reference for opening price of today
Value1 = FindBar(Date, Take_Position_Start);
P_Open = Open[Value1]; // Open price after Take_Position_Start time
Min_Short_Entry = P_Close + Min_Gap_Size_Points;
Max_Short_Entry = P_Close + Max_Gap_Size_Points;
Target_Short = P_Open - ((P_Open - P_Close) * Percent_Fill);
Stop_Price = P_Open + ((P_Open - P_Close) * Risk_Reward_Ratio);

if P_Open > P_Close then begin // Close[2]
if P_Open >= Min_Short_Entry then begin
if P_Open <= Max_Short_Entry then begin
sellshort ("SHORT") Total_Contracts contracts this bar;
Trade_Count = 1;
end;
end;
end;
end;
end;

// Short Exit
if mp = -1 then begin
if low <= Target_Short then begin // low
buytocover ("Target_Short_GU") next bar at market; // * or use limit order
// resets
Trade_Count = 0;
P_Open = 0;
P_Close = 0;
Min_Gap_Per_Short = 0;
Min_Short_Entry = 0;
Target_Short = 0;
mp = 0;
Value1 = 0;
Value2 = 0;
Value3 = 0;
Max_Gap_Per_Short = 0;
Max_Short_Entry = 0;
Target_Short = 0;
Stop_Price = 0;
end;
end;

// Stop Loss
if mp = -1 then begin
if high >= Stop_Price then begin
buytocover ("Stop_Loss_Ouch!_GU") next bar Stop_Price stop;
// resets
Trade_Count = 0;
P_Open = 0;
P_Close = 0;
Min_Gap_Per_Short = 0;
Min_Short_Entry = 0;
Target_Short = 0;
mp = 0;
Value1 = 0;
Value2 = 0;
Value3 = 0;
Max_Gap_Per_Short = 0;
Max_Short_Entry = 0;
Target_Short = 0;
Stop_Price = 0;
end;
end;

// Timed Exit since IntraDay trade only, exit all trades before market close
if mp = -1 and time >= Exit_Positions_Time then begin;
buytocover ("CLOSE_TIME") this bar;
// resets
Trade_Count = 0;
P_Open = 0;
P_Close = 0;
Min_Gap_Per_Short = 0;
Min_Short_Entry = 0;
Target_Short = 0;
mp = 0;
Value1 = 0;
Value2 = 0;
Value3 = 0;
Max_Gap_Per_Short = 0;
Max_Short_Entry = 0;
Target_Short = 0;
Stop_Price = 0;
end;

---- ^ that was the end of the gap up strategy. Place the following in a separate EasyLanguage strategy file for Gap Down.


// Gap Down Strategy

inputs:
Percent_Fill(.75), // 1 = 100%
Min_Gap_Size_Points(20), // 1 = 1 YM point
Max_Gap_Size_Points(101), // 1 = 1 YM point
Total_Contracts(1),
Take_Position_Start(935),
Exit_Positions_Time(1550) ,
Risk_Reward_Ratio(1.00);

variables:

mp(0),
Trade_Count(0),
Min_Gap_Per_Long(0),
Max_Gap_Per_Long(0),
Min_Long_Entry(0),
Max_Long_Entry(0),
Target_Long(0),
P_Close(0),
P_Open(0),
Gap_Size(0),
Stop_Price(0);

mp = marketposition;


// Gap Down, Direction Long

If time = Take_Position_Start then begin
if Trade_Count < 1 then begin
P_Close = CloseD(1);
// find bar number to reference for opening price of today
Value1 = FindBar(Date, Take_Position_Start);
P_Open = Open[Value1]; // Open price after Take_Position_Start time
Min_Long_Entry = P_Close - Min_Gap_Size_Points;
Max_Long_Entry = P_Close - Max_Gap_Size_Points;
Target_Long = P_Open + ((P_Close - P_Open) * Percent_Fill);
Stop_Price = P_Open - ((P_Close - P_Open) * Risk_Reward_Ratio);

if P_Open < P_Close then begin
if P_Open <= Min_Long_Entry then begin
if P_Open >= Max_Long_Entry then begin
buy ("LONG_ON_GD") Total_Contracts contracts this bar;
Trade_Count = 1;
end;
end;
end;
end;
end;

// Long Exit
if mp = 1 then begin
if high >= Target_Long then begin // high
sell ("Target_Long_GD") next bar at market; // * or use limit order
// resets
Trade_Count = 0;
P_Open = 0;
P_Close = 0;
Min_Gap_Per_Long = 0;
Min_Long_Entry = 0;
Target_Long = 0;
mp = 0;
Value1 = 0;
Value2 = 0;
Value3 = 0;
Max_Gap_Per_Long = 0;
Max_Long_Entry = 0;
Target_Long = 0;
Stop_Price = 0;
end;
end;

// Stop Loss
if mp = 1 then begin
if low <= Stop_Price then begin
sell ("Stop_Loss_Ouch!_GD") next bar Stop_Price stop;
// resets
Trade_Count = 0;
P_Open = 0;
P_Close = 0;
Min_Gap_Per_Long = 0;
Min_Long_Entry = 0;
Target_Long = 0;
mp = 0;
Value1 = 0;
Value2 = 0;
Value3 = 0;
Max_Gap_Per_Long = 0;
Max_Long_Entry = 0;
Target_Long = 0;
Stop_Price = 0;
end;
end;

// Timed Exit since IntraDay trade only, exit all trades before market close
if mp = 1 and time >= Exit_Positions_Time then begin;
sell ("CLOSE_TIME_GAP_DOWN" ) this bar;
// resets
Trade_Count = 0;
P_Open = 0;
P_Close = 0;
Min_Gap_Per_Long = 0;
Min_Long_Entry = 0;
Target_Long = 0;
mp = 0;
Value1 = 0;
Value2 = 0;
Value3 = 0;
Max_Gap_Per_Long = 0;
Max_Long_Entry = 0;
Target_Long = 0;
Stop_Price = 0;
end;

[ksaunders71]

We have done extensive gap trading testing over the SPI200 index futures. Please feel free to contact me for a copy of the test results.

regards
kevin

[brownsfan019]

Originally Posted by ksaunders71 We have done extensive gap trading testing over the SPI200 index futures. Please feel free to contact me for a copy of the test results. regards kevin

Go ahead and post here Kevin - you can upload a wide variety of attachments to the forum. No need for personal emails to be sent.

thanks

[NoSquigglyLines]

Originally Posted by simterann22 Check out masterthegap.com I subscribed to Scott Andrews' service for a couple of months. He uses statistical data to trade the opening gap everyday in the eminis.....plus pivot points etc. He does a pretty good job of it. I stopped subscribing because I wasn't trading futures at the time....now I am...so I'll probably subscribe again. He put out a book called "Understanding Gaps" which is useful

FWIW, I just got an email advertising a free webinar he is doing tomorrow.

Webcasts Details

I know nothing about him or his services, just passing on the info.

[dancorcal]

I just started subscribing to the auto-trading program here thegapfill.com. He has back-tested results posted, and daily video of trades for the last month or so. Just started with it, so we will see how it goes.