[brownsfan019]

There was a brief mention of gaps in another thread and I thought I'd throw this one out there and see where it might go. Personally, I've always been interested in trading the gaps, but never developed it into something that I could make regular money at.

First, a gap according to investopedia is:

A break between prices on a chart that occurs when the price of a stock makes a sharp move up or down with no trading occurring in between. Gaps can be created by factors such as regular buying or selling pressure, earnings announcements, a change in an analyst's outlook or any other type of news release.

In stocks, you see gaps all the time. In futures, you can easily see gaps as well if you set your chart to RTH only (regular trading hours). If you set your chart to 24 hours, you will rarely see anything resembling a gap.

Second, why discuss gaps? There is a theory or idea in trading that says sooner or later, all gaps get 'filled'. Filled means that price will eventually travel the distance where price gapped overnight to 'fill' it in.

The assumption being made on gap plays is this then - if we believe that gaps will fill, is there a viable daytrading strategy there?

Here's my personal take on it - some days, you can just buy/sell the first candle pattern you see that would move the price in the direction of filling the gap - other days, not so much. For example, price gaps down, you buy the first hammer you see and set your profit target where the gap would fill.

Example from ES 5 Min Chart:




End result: 1 trade for +8.75. Not too shabby, right?


But then you catch a day like this:






In summary, there are days where this gap play is very simple and clean. Other days (such as today, May 21) it can get ugly if you keep buying. Basically, if you get caught into a trend day that is the opposite of the way you are buying/selling, hold on for dear life.

With that said, maybe this could work if you give it a limited number of 'bullets' - ie, how many times you are willing to try to pick off the gap. I refer to bullets b/c that term is used a lot in poker when you are bluffing - how many bullets are you willing to fire to bluff? Same idea here - how many bullets are you willing to fire to basically sell the HOD or buy the LOD and ride it to the gap fill.

Example of firing 2 bullets:




==============

There could be a tradable strategy if you can keep your losses to a minimum. Exactly what that means, I'm not sure. Maybe w/ some discussion here it could help anyone using gaps in their planning.

DO YOUR OWN WORK AND RESEARCH BEFORE PUTTING ANY REAL MONEY AT RISK.
THE IDEA PRESENTED HERE IS INTENDED FOR DISCUSSION PURPOSES AND NOT MEANT TO LAY OUT A TRADING PLAN.
I PERSONALLY HAVE NEVER USED THIS TO TRADE LIVE MONEY ON.

Note: for entries, I assumed entry would be using a buy stop or sell stop to help minimize the amount of losing trades.

[Tinson]

Very nice presentation and commentary. Have you done historical back testing with consistency good results? If so what are the perfomance P/L ratios?
Lately,we have gap open almost every day.

Thanks,
Tinson

[brownsfan019]

As my post said:

Personally, I've always been interested in trading the gaps, but never developed it into something that I could make regular money at.

In other words, I have never used this to trade. The reason for the post was to spark conversation and see if anyone using gaps would like to give some ideas.

[Tinson]

Thanks for clarification. Gap does not mean much these days for there are too many action traders. I don't bother to filter the gap in other trading strategies in any time frame.
Tinson

[BlowFish]

Second, why discuss gaps? There is a theory or idea in trading that says sooner or later, all gaps get 'filled'. Filled means that price will eventually travel the distance where price gapped overnight to 'fill' it in.

The assumption being made on gap plays is this then - if we believe that gaps will fill, is there a viable daytrading strategy there?

There is a big issue right there even if you accept the basic premise the issue then becomes when will the gap fill and how far will price travel against you in the meantime?

[Tams]

Originally Posted by BlowFish »

[I]Second, why discuss gaps? There is a theory or idea in trading that says sooner or later, all gaps get 'filled'. ...

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.

[brownsfan019]

If you assume that it will fill the current session 50% of the time, then that is something to work with. The next step would be how many bullets to fire to achieve maximum profit w/ minimum losses.

The 50% stat is an interesting one if there was a verifiable source.

Like I said, it never worked for me and I thought I'd post to see if anyone is trading gaps successfully. When it works, it's such an easy trade. When it doesn't, it can get messy if you continue to fire.

[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