Gap Fades

Quote from gnome:

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.
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Thanks for your detailed reply, gnome.

In your long experience of trading bear markets, do you find that gap fades are, on balance, high probability trades provided there aren't signs that a tradable rally has begun?

Further, how do you pick a decent entry point for such trades?

Thanks again.
 
I've been working on a premarket gap strategy for four years. Here are my statistics for my best yet strategy.

Gap down short 61%
Gap down long 74%

Gap up long 73%
Gap up short 84%

Provided you wait for the correct signal:D
 
Quote from redeye5:

...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...
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Subsequent to writing that material, Trade the Markets (John Carter and Hubert Senters) have licensed the gap material from Fading the Gap to teach their students.
 
Quote from maxni:

Thanks for your detailed reply, gnome.

In your long experience of trading bear markets, do you find that gap fades are, on balance, high probability trades provided there aren't signs that a tradable rally has begun?

Further, how do you pick a decent entry point for such trades?

Thanks again.
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1. On some gaps, it's correct to chase. On others, fade. No simple rule.

2. Take a guess.. just like any other trade.

And if you're playing for "signs of a tradable rally has begun".... you have to guess at that too. One of the great traps in trading is to presume you know more than you actually do.
 
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.
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It depends on why there is a gap. Gaps with no news to back them up are more likely to fail then Gaps based on major reports that came out at 8.30 or because of earnings, or fed action etc. Also understand that gaps on the last day of the month or qtr or first day of the month or qtr behave differently.

Rather then look at it in terms of how big the gap is try to look at it in terms of why there is a gap. Carter used premarket volume on certain stocks to try to understand if the gap is real or not. I wouldn't use those same stocks he used. They are outdated and are not as important as before. I feel its more important to try and understand the news that is driving the gap rather then use premarket volume on certain stocks.

Spend time learning what time of news is meaningful and what news will garner a bounce but is really bogus and will end up failing.
 
Quote from jficquette:

It depends on why there is a gap. Gaps with no news to back them up are more likely to fail then Gaps based on major reports that came out at 8.30 or because of earnings, or fed action etc. Also understand that gaps on the last day of the month or qtr or first day of the month or qtr behave differently.

Rather then look at it in terms of how big the gap is try to look at it in terms of why there is a gap. Carter used premarket volume on certain stocks to try to understand if the gap is real or not. I wouldn't use those same stocks he used. They are outdated and are not as important as before. I feel its more important to try and understand the news that is driving the gap rather then use premarket volume on certain stocks.

Spend time learning what time of news is meaningful and what news will garner a bounce but is really bogus and will end up failing.
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I agree, it would seem logical that the more specific the underlying, the more necessary it is to understand why the gap exists. If you're trading an index and there is no 'major' market information or cause then I think its reliable that you can benefit from the statical fact that most entities do close their day to day gap.

If you want to trade individual equities, I think you need to be on the look out for events and causes for gaps - more so than indexes. Its also helpful to have some confidence in the equity, that it has a history of closing gaps, or at least not failing to close the gap with huge move in the other direction.

Gaps are a great play, as long as you don't fall asleep at the wheel. Like John Carter, who's book I really enjoyed, if the situation is not absolutely ideal, then skip the trade. This is easy if you're gap closing on equities because there are lots to choose from.

Let me know how you do. Nice SN by the way.

Redeye
 
Another thing I thought of after I wrote the other post is that you may want to try gap fills on ETFs. Never looked at doing this, but they may be reliable.


Redeye
 
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