Gap Fades

R

redeye5

Does anyone have any suggestions or comments about an intraday gap fade strategy for futures?

In John Carter's book Mastering the Trade, he recommends gap fades as one of the best types of trades for those who have a full-time (non-trading) job, which includes myself.

He recommends YM and ES as being more reliable than NQ or ER2. A filter he uses is pre-market volume in cash stocks that are also SSF stocks, particularly KLAC, MXIM, NVLS and AMAT. If volume of these stocks is above 70,000, then this indicates a professional breakaway gap and the gap is not faded. If between 30,000 and 70,000 then he uses 2/3 size, 1/2 exit at 1/2 gap fill and other 1/2 at gap fill. If under 30,000, then full size and exit entire position at gap fill. Gaps must be at least 10 on YM or 1 on ES. For stops, with gaps under 40 YM or 4 ES, there is 1.5:1 risk:reward and over 40 YM or 4 ES a 1:1 risk reward (so for 50 point gap on YM, use 50 point stop).

There is also a study posted on the mypivots.com website about gap fades, based on a study of ES data from 1/15/02 to 2/20/04. Various parameters were discussed. For example, ES gaps of 7 or less have a better tendency to fill intraday than larger gaps. Also gaps on Monday have the lowest probability (64%) of being filled, whereas gaps on Thursday have the highest chance (86%).

I'm looking to use gap fades as a strategy and would like to hear from any others with experience or interest.

Also, besides the US equity markets, do gap fills work equally as well with European or Asian equity markets? How about in other futures markets such as bonds, metals or energy?

Thanks in advance.
 
When you said "intraday gap", you meant "opening gap", right?

There is no general rule on gaps (many traders claim, "gaps always ______", but they don't). There are 3 types with a variation on each. That means there are 6 possibilities.

To get the "gap play" right you either have to guess at which one it is this time, or recognize it quickly and chase quickly.
 
Quote from redeye5:

Does anyone have any suggestions or comments about an intraday gap fade strategy for futures?

In John Carter's book Mastering the Trade, he recommends gap fades as one of the best types of trades for those who have a full-time (non-trading) job, which includes myself.

He recommends YM and ES as being more reliable than NQ or ER2. A filter he uses is pre-market volume in cash stocks that are also SSF stocks, particularly KLAC, MXIM, NVLS and AMAT. If volume of these stocks is above 70,000, then this indicates a professional breakaway gap and the gap is not faded. If between 30,000 and 70,000 then he uses 2/3 size, 1/2 exit at 1/2 gap fill and other 1/2 at gap fill. If under 30,000, then full size and exit entire position at gap fill. Gaps must be at least 10 on YM or 1 on ES. For stops, with gaps under 40 YM or 4 ES, there is 1.5:1 risk:reward and over 40 YM or 4 ES a 1:1 risk reward (so for 50 point gap on YM, use 50 point stop).

There is also a study posted on the mypivots.com website about gap fades, based on a study of ES data from 1/15/02 to 2/20/04. Various parameters were discussed. For example, ES gaps of 7 or less have a better tendency to fill intraday than larger gaps. Also gaps on Monday have the lowest probability (64%) of being filled, whereas gaps on Thursday have the highest chance (86%).

I'm looking to use gap fades as a strategy and would like to hear from any others with experience or interest.

Also, besides the US equity markets, do gap fills work equally as well with European or Asian equity markets? How about in other futures markets such as bonds, metals or energy?

Thanks in advance.
More...

I have a bunch of old data on gaps I shared on ET. The size of the gaps is likely a bit different now, as it changes with market voaltility, howerver the premise on the size of the gap remains very much in effect.
 
gnome

Quote from gnome:

There are 3 types with a variation on each. That means there are 6 possibilities.
More...

Interesting! Would you mind elaborating a little on these 6 possibilities?
 
There is no specific rule that works on gaps, you have to trade them like any other setup and take what comes. But if you are looking for a gap to always do X, or always do Y, you will lose a lot of money.

Here is a good blog that is no longer updated, but has years of charts focused on gap trading. And there are links to other blogs that do similar things. If you are interested in trading gaps on equities, it is a good (free) place to start.

http://traderx.blogspot.com/
 
Quote from maxni:

gnome



Interesting! Would you mind elaborating a little on these 6 possibilities?
More...

1. Gap-n-Crap. Variant is where the price noodles around one the opening bar's extreme's for a bit then takes off in the opposite direction of the gap.

2. Gap-n-Go. Variant is ame as above, but takes off in the direction of the gap.

3. GFR.. Gap-Fill-Resume. That's where the gap is retraced before resuming in the direction of the gap. Variant is the "half-fill-and-resume"... the gap is 50-61% retraced, then takes off in the direction of the gap.
 
Quote from IanMacQuaide:

I like the Gap Fill Bounce.
Let it fill the gap, then fade it. Works out very well if you're just not greedy about it.
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It's one of my favorites too, but you can't simply say, "I'm going to fade it when the gap fills"... if you wait only for that, you've got only 6:1 odds of being right.
 
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