[atto]

I have a decent amount of experience here, so will share some if anyone wants to look into this. I have an automatic strategy that trades gaps on ES that has a fairly impressive track record. This isn't my primary method of trading, but was one of my first statistical looks at markets, and has helped smooth out the P/L curve. It trades using statistical biases I've found, and only actually attempts roughly 20-25% of the time (but it's actually highly accurate, and has a good r:r). In turn, many of the "gap and go" days are filtered out.

For those who are statistically inclined, here are some things to look into regarding statistical biases for gaps. Remember, if the gap filled or not is only one side of the coin. Also look at the bias in context of the gap size and risk.

• Is the general market trending or congesting?
• How big is the gap? (I have filters for gaps that are too big, and too small)
• How does gap size compare to ATR? (same)
• Have the previous x gaps filled? (look at both the direction of the gap, and against)
• How does gap direction compare to the trend direction? (look at a few timeframes)
• Where is the gap positioned compared to the previous day's value area? (ie, is there liquidity close by?)
• Where is the gap located compared to yesterday's High and Low? (inside/outside)
• What day of the week is it? (yes, there's a bias)
• How volatile has the market been?
• Is the gap near S/R? (this is one of the hardest to automate, so sometimes you end up cutting corners)

This list is by no means complete, and I'd encourage someone who wants to delve into this look into these suggestions along with any other ideas they may have. I simply got a decent amount of historical data (think a couple years), and did some testing for each of my potential biases in Mathematica (Excel also works well for this) with a portion of the data. Once I had a good idea of a potential bias, I tested it on out of sample data.

When combined, these biases give you a much better idea of the statistical edge you may have by trading any given gap. I programmed the strategy to enter anywhere from 9:00 to 9:45 on a technical trigger (for brownsfan's case, he looked at hammers; you may prefer some type of indicator or other method). Exits are enabled within a certain % of the gap fill, and exit on a similar technical trigger (so they may go past the gap).

Hope this gives budding statisticians some ideas. In addition to biases, stop strategy is very important (and could be a bias in itself.. if price goes x% against, what's the chance it'll go back and fill?). Something mine does not do is the "bullets" approach, and there could be some validity in that.

Hope I didn't barge in on your candlestick discussion, browns

[BlowFish]

Originally Posted by Tams »

There was a study done... this was a long time ago, I do not have the reference anymore.

Basically it found that about 50% of the gaps were filled within the next oscillation...
some were eventually filled, e.g. 6 months later, which were of little use to a gap trader.
some were never filled.


There you go... you have a 50-50 chance...

With all things considered, this is about normal in many trading methodologies.

So for the 50 that get filled look at the maximum adverse excursion before filling and there you have the basis of a strategy (if MAE < gap)

Actually I might be inclined to look at some sort of internals/sentiment indicator to try and gauge.

Didn't some TA chap classify gaps as 'runaway gaps' or 'exhaustion gaps'?

[thrunner]

Originally Posted by BlowFish »

... Didn't some TA chap classify gaps as 'runaway gaps' or 'exhaustion gaps'?

In the days of old, before the merger was consummated, there was a chap named JC, who was pumping for CBOT, and he wrote this about the gap (not sure about the 'lowest risk' part, not sure about what JC wrote about the mini Dow and emini S&Ps, not sure about a lots of things JC wrote actually ...) :

These are critical steps and without them a trader is doomed to failure. I could write a couple of books on these subjects, but for the sake of this article, let's boil this down to the brass tacks: Traders who want to survive at this game have to understand gaps, and taking advantage of gaps using the CBOT mini-sized Dow contracts is one of the best ways to stay profitable.

Each day in the market there is one opportunity that represents the lowest risk trade available, and that is the opening gap. Gaps occur when the next day's regular session opening price is greater or lower than the previous day's regular session close, creating a "gap" in price levels on the charts. Gaps occur in many markets, but the key to making money on gaps is four-fold:

1. Knowing whether the gap is a break away or a fade.
2. Knowing how much time it needs to fill its gap.
3. Knowing how much of your equity to risk.
4. Playing gaps in the market most suited to your personality.

Before we take a look at how I play the gaps every day, I want to first take a look at the best market to utilize for these plays. Markets are a reflection of the traders who trade them. The emini S&Ps are a great market to trade if you are 22 years old and obtain 30% of your daily nutritional intake from Starbucks. This is a market made up of traders who are hyper-reactive, with many players trading thousands of contracts a day for quarter point gains. This is the type of intensity that can't last and burns people out. On the flip side, if a trader is more methodical and takes more than half an hour to decide which socks to wear with a pair of gray pants, then trading Exxon-Mobile (XOM) stock is going to be right up their alley.

[zdo]

Bf

I only fade a gap if it is into a ‘fib’ cluster or cycle extreme. SR would work too. These days I also filter with the nature of how the gap was formed in the overnight - really no such thing as a gap anymore. hth

[programmer]

Originally Posted by zdo »

Bf

I only fade a gap if it is into a ‘fib’ cluster or cycle extreme. SR would work too. These days I also filter with the nature of how the gap was formed in the overnight - really no such thing as a gap anymore. hth

I agree ZDO.

About a year ago TRO coded a strategy for TS that seeks to filter only stocks with gaps (X) and calc the odds that X would fill based on historical stats (I think its on Kreslik.com), if anybody wants to check it out.

The nature of a gaps is enthused buying/selling which if negative to the open can put the market maker in trouble sometimes thus making them to seek "closure" and thus join the gap fill party, however today market makers are totally unpredictable even on that.
I do not use gaps anymore apart from ZDO's approach.

[bathrobe]

I used to get the TTM free videos and they claimed that a gap (cannot remember if it was on ES or YM) had a 62% chance of a half-fill and if a half-fill happened then an 82% chance of complete fill.

You could definitely put the odds more in your favor by using candlestick patterns as Brownsfan pointed out in the first post.

[brownsfan019]

A couple examples from this week:








2 perfect, super easy trades. 1 trade and done.

In the first chart, you'd want to hold most of the day. In the 2nd chart, exiting near the gap fill is ideal.

So there's a possible entry system here (with the biggest question being how many bullets to fire), which then leads to the next part of the equation - where/how/when to take profits.

[brownsfan019]

Looking at the charts, if you trailed your profit on the candles once the gap was filled, the previous charts could look like:








On trades w/ decent moves (like first one), this could provide some additional profits vs. covering at the gap. In the 2nd example, it yields more than covering at the gap level, just not as much as the 1st chart.

So there's an idea for exits for anyone doing some work on this idea.