Fading the opening gap

Quote from Charlie Dow:

Question, was this in the cash Market? If it is please tell me what single instrument you use to trade it.
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I had the same question.

I don't think that you can use a cash index for a gap study.

I believe (and I could be wrong) that the cash index will open the day using the first traded price or last quoted price of any stock. So if, for example, half of the index doesn't trade in the first minute then the previous day's closing price of those stocks are used to calculate the index.

I believe that the only truly reliable gaps to play are ones which have overnight markets with liquidity supported by a pit market during RTH. Classic would be ES. The overnight market establishes a fair value gap before the pit adds liquidity to the market.

By pit - we can also assume an underlying cash market as well as regular business hours for traders. I say that because I believe that all the pits will be gone within 10 years but the concet of RTH will remain in the form of the restricted trading hours for the underlying cash and business hours of regular day traders.

(Wild assumptions I know.)
 
Quote from guy2:

I had the same question.

I don't think that you can use a cash index for a gap study.

I believe (and I could be wrong) that the cash index will open the day using the first traded price or last quoted price of any stock. So if, for example, half of the index doesn't trade in the first minute then the previous day's closing price of those stocks are used to calculate the index.

I believe that the only truly reliable gaps to play are ones which have overnight markets with liquidity supported by a pit market during RTH. Classic would be ES. The overnight market establishes a fair value gap before the pit adds liquidity to the market.

By pit - we can also assume an underlying cash market as well as regular business hours for traders. I say that because I believe that all the pits will be gone within 10 years but the concet of RTH will remain in the form of the restricted trading hours for the underlying cash and business hours of regular day traders.

(Wild assumptions I know.)
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You were reading my mind, weren't you. I wanted to see the response first but these were my thoughts as well.
 
Quote from Charlie Dow:

Anyone trading the E-Mini's or any other Market that trades and logs trades overnight and purposely omits that overnight data and calls it a GAP deserves all the inconsistent profitability they get in their day-to-day trading.
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Charlie,

What do you mean by this?

If you're trading a pit traded contract that has a contract that could be proxied by an overnight electronic contract then this sort of concept would probably exist everywhere.

I believe that you can almost always proxy any market through some 3rd party company like a spreadbetting company to cover you outside of RTH...

In other words, is there any market that has a pure gap play?
 
Quote from guy2:

Charlie,

What do you mean by this?

If you're trading a pit traded contract that has a contract that could be proxied by an overnight electronic contract then this sort of concept would probably exist everywhere.

I believe that you can almost always proxy any market through some 3rd party company like a spreadbetting company to cover you outside of RTH...

In other words, is there any market that has a pure gap play?
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I'm sure you realize that the "Don's openings and more" thread outlines where "playing the opening gap" takes place daily. Since the NYSE Specialists receive orders all night long, they must move the opening prices either up or down to accomodate the excess orders...and they generally participate on the offsetting side of the trade. You can't do this with an index that trades 23 1/2 hours per day.

Don
 
Quote from Don Bright:

I'm sure you realize that the "Don's openings and more" thread outlines where "playing the opening gap" takes place daily. Since the NYSE Specialists receive orders all night long, they must move the opening prices either up or down to accomodate the excess orders...and they generally participate on the offsetting side of the trade. You can't do this with an index that trades 23 1/2 hours per day.

Don
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Don, is that not the same as an index that trades 23.5 hours a day?

I ask this because, as I mentioned earlier, you can usually find a 24 hour market in an NYSE stock by going through a spreadbetting or similar company?

Guy
 
Quote from guy2:

Don, is that not the same as an index that trades 23.5 hours a day?

I ask this because, as I mentioned earlier, you can usually find a 24 hour market in an NYSE stock by going through a spreadbetting or similar company?

Guy
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Sure, you can find a "market" around the clock in NYSE issues, but since the liquidity is so poor, you can't really trade of those prices. We tend to keep our people away from off-hours trading (except, of course, to close positions).

Even if a stock is trading up $1.00 or more in the pre-market, it may very well gap another $1.00 or more when there is a few hundred thousand shares traded "opening only" ...

There are only two times of the day that we have a single price NYSE stock, the opening and the closing (MOC), and these two times are when we can be pretty sure of trading on the same side as the Specialist, which is usually and edge.

All the best,

Don
 
Thanks for the insight Don.

Completely off the topic I notice that you and I had an almost identical tag line / signature - mine seems to have dissappeared off my profile though.
 
Quote from guy2:

The "Raw Gap Play" for the ES showed a loss of 18.75 points for the month of August.
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There is absolutely no reason that any "opening gap" play would work with futures...they trade nearly 24 hours, there is no "single place market" no "specialist" and thus no "edge" with a play such as this.

It works on NYSE listed stocks for obvious reasons.

All the best,

Don
 
I agree that gap effects have become less effective because of 24 hour trading. If you use day session only and base it on the pit SP500, I think we still have some effect because the open is still a event. In many ways it like the changes in opening range breakout in the bonds in the late 1980's when they changed the time of the open from 9:00 am to 8:20, now the reports come out after the open. Larry Williams and Sheldon Knight made a forture because the report came out at 8:30 and the bonds opened at 9:00 am. This made a breakout from the open much more reliable on these report days , which accounted for big range days.
 
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