[es] Trading the Opening Gaps

[MarketExceptions 10]

I have been trading the opening gaps for quite a while. My opening gap trades are based on some research I do trying to understand the behavior of gaps in various market conditions.

It has been profitable for me and some of the other people I helped.

In this thread I will share my information with you. I will also suggest the days and the conditions that I think are profitable to trade the gap.

But first lets start with basics:

Frequently the market opens in the morning at a different price than the price it closed at, the day before. This is called an opening gap. If the market opens higher, it is called an up gap and if it opens lower, it is called a down gap. Statistics shows there is a tendency that the price moves towards the close of yesterday. Many times the price reaches the close of yesterday, in which case we say the gap was filled. In fact, about 70% of all gaps get filled the same day. This should not be a surprise because the close of yesterday is the most important price we have. It is a price that buyers and sellers finally agreed on after a whole day of fighting with each others. This is a price that makes the most psychological impact on traders minds.

Experienced traders usually pick a narrow area of market to become master at. This area of opening gap can be the that small area of the market you may want to consider to be your area. There are many advantages in trading the opening gap. The one advantage is that most of the time your trade is done by 11:00 AM, many times much earlier, and you can have the rest of the day for yourself.

Generally speaking, there is a tendency that market closes the gap at some point. This is called fading a gap. However, this general tendency is not strong enough to justify the risk and reward for any size gap at any day under any market conditions or recent market patterns.

Successful gap traders pick certain gaps under certain conditions that gives them the edge. Just like any other strategy, you want to pick the cream of the crop to trade.

I have studied the opening gaps for quite a while. Using my background in probability and statistics, I have worked on many aspects of opening gaps, starting with the most common aspect that is fading a gap.

[neilwein1 10]

Your post was very interesting. Did you follow up this post with info on trading the opening gap? Thank you for your help.

[Tradewinds 12]

10-19-10 ES Gap Fill - The ES did not fill the overnight half gap today. It came close, but did not fill. There is a gap, however, that the ES did fill. And that is the half gap from midnight on. I use two different Half Gaps". One is the traditional half gap from yesterdays close to today's open. The other one is from today's price at midnight to today's open. They are often two different price levels, and tell a story. Today's gap was from 1181.25 down to 1167.25. So there was an unusually big drop overnight. To big a gap, I guess, to fill the overnight half gap. But again, the midnight to open half gap filled. And it filled by 10:15

[snowbird 10]

why midnight? what is so important about that particular time.... most traders are sleeping.

[BlowFish 10]

why midnight? what is so important about that particular time.... most traders are sleeping.

 

Isn't that the whole point of gaps? Gaps occur when markets are 'sleeping'.

 

I presume as he speaks of 'half gaps' he is dividing the gap by time (hence midnight).

 

Incidentally markets really are 24 hours now maybe most US traders are sleeping though I know a few who get up for the EU open. That is one of the issues facing gap traders. I wonder if you have looked at other instruments TW? I am thinking ones that still trade in sessions and that are reasonably un correlated with instruments that trade 24 hours.

[Tradewinds 12]

If you take the price at midnight, then the price at 9:30, add them together and divide by 2, that is half the distance between the two price levels. I can only guess at why the half gap based on midnight and 9:30 sometimes works. Traders probably have had time between the close of yesterday, and midnight to think about what is probable and what their strategy is going to be. Maybe there is new information. In any case, the sentiment of investors can change from yesterday at the close to very early morning. And that sentiment, speculation, hedging, whatever their strategy is, is reflected in the price action.

[Tams 20]

If you take the price at midnight, then the price at 9:30, add them together and divide by 2, that is half the distance between the two price levels. I can only guess at why the half gap based on midnight and 9:30 sometimes works. Traders probably have had time between the close of yesterday, and midnight to think about what is probable and what their strategy is going to be. Maybe there is new information. In any case, the sentiment of investors can change from yesterday at the close to very early morning. And that sentiment, speculation, hedging, whatever their strategy is, is reflected in the price action.

 

you said the keyword...

if you find 2 numbers,

anywhere,

any numbers,

then divide them by whatever number (it doesn't have to be 2),

you will find them sometimes works.

[Tradewinds 12]

you said the keyword...

if you find 2 numbers,

anywhere,

any numbers,

then divide them by whatever number (it doesn't have to be 2),

you will find them sometimes works.

 

I don't know what percentage of the time it works. I don't have extensive data with statistically proven numbers within a certain deviation error as backup proof. Do I need that before I make a post? I'm new here, so I just want to make sure. My apologizes to everyone in the group if I have provided misleading and useless information that does more harm than good.

It's really cool what you did with the big red letters. Can you teach me how to do that? Maybe I can figure it out on my own.

[Tams 20]

I tried sending Tams an email, but Tams doesn't accept personal messages, so I'll post this here. The two numbers that I use are not just any two numbers. They are specific numbers under specific conditions. Tams post seems to insinuate that I just picked two numbers at random and divided them by some other random number. What is your point Tams? I don't know of anything in trading, where something is true all the time. So, I did not quantify exactly what I meant by "sometimes", and Tams did not quantify or provide anything to refute the half gap strategy. At the very least, Tams has twisted my words. If it was unintentional, then it shows a lack of paying attention to detail, and making a comment before you know what you are talking about. Hopefully that was the case.

 

if you think I insinuate something, you are full of self-serving imaginations.

if you are upset because of it, that's your own fricken problem.

no skin off my back.

 

Hey, you are twisting my words.

Why don't you pay attention to what I highlighted?

 

this is an anonymous open discussion board,

people talked about all kinds of things... including those that are none of your business.

 

I turned off the email to prevent idios like you sending me stupid self-righteous messages.

(if I could block that crybaby mods, I would too)

Edited October 21, 2010 by Tams

[Tams 20]

here's a Half-Gap indicator to help you see your way:

 

 

code and real life examples here:

http://www.traderslaboratory.com/forums/f46/half-gap-7738.html

[86834 10]

In my experience, ES tends to reverse on the first major s/r level that it hit's in the morning, weather this be closing a Gap or a level as simple as the globex high or low. If you look at a 30min chart for this week, you'll see what I mean.

 

A market where trading the gap is very clear and highly effective is the bund. If gaps are something that you like trading, you might want to have a look at it as well as the markets you currently trade.

[EminiTradingCoach 10]

You did an excellent job building a foundation for what the opening gap is. I was hoping you might actually share some of the rules you've developed over the years. I've attended several Master the Gap webinars on the topic. They've always been very informative. The main rule I took aware from their presentation is that the best gap plays are ones that fit in between the previous day's close and the previous day high or low depending on the close.

 

Gap Up: In between Close and Previous Day's High

Gap Down: In between the Close and the Previous Day's Low

 

Does anybody else have any other rules they would like to share regarding the Opening Gap?

[Tradewinds 12]

The main rule . . . is that the best gap plays are ones that fit in between the previous day's close and the previous day high or low depending on the close.

 

Gap Up: In between Close and Previous Day's High

Gap Down: In between the Close and the Previous Day's Low

 

 

Interesting, I hadn't heard of that before. I've heard people say that they don't try to fade the gap if, for example, the ES has gapped more than 10 points. There are days when the gap doesn't fill. My opinion is, that you can make a judgment about that according to how unexpected the news was. If there was an extremely positive news surprise for example, and UVOL is just screaming up, then I wouldn't try to fad the gap up.

[BlowFish 10]

It's very easy to do statistical analysis on gaps. Either use your favourite charting package or if it's scripting language is beyond you, use excel. Rather than rely on some 5th hand rules based on some nebulous 'research' done when the pit session was the only game in town, see for yourself what is 'best', that is my number one rule

 

Opening gaps, opening range break outs, globex highs lows....even 'floor' pivots are all simple to test and can form the basis of a robust strategy. There really is no excuse for not doing the work yourself or if you really do want to rely on someone else (why?), pick someone that at least appears to have done it (or verified it) themselves. Someone that present rigorous test results with a robust (and obviously well documented) test procedure.

[kuokam 10]

Agree the bund is very good at filling its gaps, generally within 2 hours. But looks like the bobl is even better. Have you traded it ?

 

 

 

In my experience, ES tends to reverse on the first major s/r level that it hit's in the morning, weather this be closing a Gap or a level as simple as the globex high or low. If you look at a 30min chart for this week, you'll see what I mean.

 

A market where trading the gap is very clear and highly effective is the bund. If gaps are something that you like trading, you might want to have a look at it as well as the markets you currently trade.

[tradingwizzard 10]

I really hate gaps, and especially on the equity markets......any strategy based on them seems to be randomness at its best.........IMHO

[mitsubishi 24]

I really hate gaps, and especially on the equity markets......any strategy based on them seems to be randomness at its best.........IMHO

 

You hate them? Well,we've all got our pet hates on here haven't we?

 

You dug this old thread out just to tell us this.Still,lets run with it.So tell us how you arrived at this controversial and thought provoking announcement wiz.

How extensive and thorough was the research?.... i'm taking a wild guess partly based on your choice of words..such as "seems",but I could be very wrong.Btw,your post count is coming along nicely.When are planning to start marketing?

 

As you have an opinion on just about anything- I got a neighbour (farmer) who's doing a bit of a diy fix on one of his tractors which is running lean..He thinks it may be the velociraptor valve playing up,whereas I think it's the multi pin on the stegosaurus tail injector....any suggestions?

[tradingwizzard 10]

You hate them? Well,we've all got our pet hates on here haven't we?

 

You dug this old thread out just to tell us this.Still,lets run with it.So tell us how you arrived at this controversial and thought provoking announcement wiz.

How extensive and thorough was the research?.... i'm taking a wild guess partly based on your choice of words..such as "seems",but I could be very wrong.Btw,your post count is coming along nicely.When are planning to start marketing?

 

As you have an opinion on just about anything- I got a neighbour (farmer) who's doing a bit of a diy fix on one of his tractors which is running lean..He thinks it may be the velociraptor valve playing up,whereas I think it's the multi pin on the stegosaurus tail injector....any suggestions?

 

first of all, I didn't dig the thread, and even if I did, I don't see what the problem is...

second, I find your tone being unpolite, not to say more

and third, it s probable the velociraptor valve

[kuokam 10]

Totally agree with you that, as a Master, Mits could have been a bit more welcoming to you but who knows, everybody have their ways of saying welcome .

Nonetheless I agree with him: which argument are you bringing to the discussion at hand? Any trading strategy you think of can be deemed worthless by anybody who doesn't master it. Mr Google can testify that there are lots of successful gap traders and teachers.

Attached is a chart of the Bund with 8 recent gaps. They didn't all fill, but that should be okay for the probability player, as the overwhelming majority (5/8) got filled with awesome profits. And there are some lessons to be learned from those not filled as well, if you scrutinize them closely.

 

first of all, I didn't dig the thread, and even if I did, I don't see what the problem is...

second, I find your tone being unpolite, not to say more

and third, it s probable the velociraptor valve

[tradingwizzard 10]

Totally agree with you that, as a Master, Mits could have been a bit more welcoming to you but who knows, everybody have their ways of saying welcome .

Nonetheless I agree with him: which argument are you bringing to the discussion at hand? Any trading strategy you think of can be deemed worthless by anybody who doesn't master it. Mr Google can testify that there are lots of successful gap traders and teachers.

Attached is a chart of the Bund with 8 recent gaps. They didn't all fill, but that should be okay for the probability player, as the overwhelming majority (5/8) got filled with awesome profits. And there are some lessons to be learned from those not filled as well, if you scrutinize them closely.

 

well, the reason I said what I said it's about the simple fact that gaps are a controversy for the whole trading world as a matter of fact

 

western world consider them mandatory to close, while Japanese consider them continuation patterns (rising and falling windows).....so where's the catch? where's the trick?....oh wait.......the ones that do not close under the Western world approach, should be considered continuation patterns.....and the ones that do close should be considered regular gaps...like in London's subway.."mind the gap"....so in the end, it's about how you perceive them and how are you trading them.....same examples of successful traders looking for gaps to be closed exists of traders treating them as continuation patterns

 

I trade mainly currencies...this being a fact, I find sometimes that regardless of what stock are you in, because of fundamentals (daily ones), the indices are going down and your stock as well, so gaps are mostly common on equities...that's why, not relevant.....in conclusion, if you want to trade/study/interpret gaps, look at currency markets.......

 

hey, Mits, is this answer good enough for you? even if not, as Bobcollet puts it, you are 10 times better at Gann's approach...so no hard feelings taking, I would really appreciate your point of view on the Knowledge is of more value as gold thread......or email me if you don't want to post there, whatever....thanks and excuse my French....

[mitsubishi 24]

Totally agree with you that, as a Master, Mits could have been a bit more welcoming to you but who knows, everybody have their ways of saying welcome .

Nonetheless I agree with him: which argument are you bringing to the discussion at hand? Any trading strategy you think of can be deemed worthless by anybody who doesn't master it. Mr Google can testify that there are lots of successful gap traders and teachers.

Attached is a chart of the Bund with 8 recent gaps. They didn't all fill, but that should be okay for the probability player, as the overwhelming majority (5/8) got filled with awesome profits. And there are some lessons to be learned from those not filled as well, if you scrutinize them closely.

 

One of those unclosed gaps does close later but not on same day.So maybe higher odds for longer term trades v day trades?

[mitsubishi 24]

well, the reason I said what I said it's about the simple fact that gaps are a controversy for the whole trading world as a matter of fact

 

western world consider them mandatory to close, while Japanese consider them continuation patterns (rising and falling windows).....so where's the catch? where's the trick?....oh wait.......the ones that do not close under the Western world approach, should be considered continuation patterns.....and the ones that do close should be considered regular gaps...like in London's subway.."mind the gap"....so in the end, it's about how you perceive them and how are you trading them.....same examples of successful traders looking for gaps to be closed exists of traders treating them as continuation patterns

 

I trade mainly currencies...this being a fact, I find sometimes that regardless of what stock are you in, because of fundamentals (daily ones), the indices are going down and your stock as well, so gaps are mostly common on equities...that's why, not relevant.....in conclusion, if you want to trade/study/interpret gaps, look at currency markets.......

 

hey, Mits, is this answer good enough for you? even if not, as Bobcollet puts it, you are 10 times better at Gann's approach...so no hard feelings taking, I would really appreciate your point of view on the Knowledge is of more value as gold thread......or email me if you don't want to post there, whatever....thanks and excuse my French....

 

Thanks wiz.Now we have some sort of discussion going and I see you have a sense of humour...

Not sure about the Gann comment....he was good for one thing though..thinking outside the box.

[steve46 12]

Trading gaps is about understanding what the gap signifies.....if the gap is an expression of momentum....the real question is....."is there enough interest and latent momentum in the market to sustain continuation of that move.....or is that interest and momentum exhausted (as is often the case) on the next open (whether it be the next open of a bar or candle, or the next open of a market session)

 

As with most things in financial markets, the "tell" is volume and the acceleration of either buying or selling volume on the next "open" after the gap....

 

For those who have a way to read volume, you simply watch which way it goes and compare to the movement of price in that same time frame.....IF volume is ramping up AND price is accelerating toward the gap fill, chances are quite good that the gap will fill...if (as is mostly the case) that momentum is exhausted on the open, you will may see one of two scenarios

 

Scenario 1....volume ramps directionally but price does not respond....this indicates that the other side has more horsepower and the move is likely to fail..

 

Scenario 2....volume and price create a reversal pattern and after a short hesitation, volume ramps up and then price follows in the opposite direction creating a reversal...

 

The bottom line is this....for those who don't or can't read volume, look for the acceleration of price either toward the gap fill or away....typically price will hesitate, creating a sideways move, and at that point you usually have an opportunity to enter...

 

Good luck

[kuokam 10]

The longer the time, the riskier the outcome imho. Not sure the extra risk is worth the while. I always consider gaps as intraday plays.

 

 

One of those unclosed gaps does close later but not on same day.So maybe higher odds for longer term trades v day trades?

Edited July 21, 2013 by kuokam

[MadMarketScientist 11]

Easy guys ... let's all try to have constructive discussions without the negativity and name-calling

 

thx

MMS