How to fade very large gaps up in US equities

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pragmatic-trader

I want to try my hand at intraday fading large overnight gap up (10-100% gaps) in small cap US equities, entering the trade within 5-30 minutes after open and holding for 30 minutes to 2 hours.

Does anyone have experience with this? What are some variables we can look at to make this work? I can think of a few variables we should look at:

- spike into resistance level just after open with declining volume as we approach resistance
- selling pressure to start coming in on the tape
- understanding of the catalyst that led to the gap (be inclined to sell when there isn't a catalyst or when the catalyst is weak)
- short interest
- does the stock have a tendency of reverting after big overnight gaps in the past year?
- unable to hold above intaday VWAP
- whether the multi-day trend is up or down

Anything else worth looking at?
 
Time seems arbitrary. I see most gaps filled within the first 90 minutes, irregardless of size. Then some take weeks to fill. How do you place a stop? I see Gaps continue by multiples of the the gap size and then, turn to fill them. I use gaps to gain entry and exit, but very tricky business.
 
LanceJ said:
Time seems arbitrary. I see most gaps filled within the first 90 minutes, irregardless of size. Then some take weeks to fill. How do you place a stop? I see Gaps continue by multiples of the the gap size and then, turn to fill them. I use gaps to gain entry and exit, but very tricky business.
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What variables do you use to decide when to pull the trigger (i.e. which gaps you think are about to close) versus when to step back and decide to not short (i.e. which gaps you think will continue)? Fading 100% of gaps is not a profitable strategy, so how do you pick which ones you're going to fade?
 
There are basically 4 "technical gap concept" plays.

1. Gap-n-Go... gap is the opening high/low and races ahead in that direction.

2. Gap-n-Crap... gap opens on hi/low for the day (swing), reverses almost immediately and continues the reversal move

3. Gap-fill-Resume.... the gap is retraced, then the market resumes the move in the direction of the initial gap.

4. Gap-half fill-Resume... Gap opening is retraced about 1/2 way, the resumes in the direction of the opening gap.

Trader's job is to figure out "which" it is and play accordingly.
 
Scataphagos said:
There are basically 4 "technical gap concept" plays.

1. Gap-n-Go... gap is the opening high/low and races ahead in that direction.

2. Gap-n-Crap... gap opens on hi/low for the day (swing), reverses almost immediately and continues the reversal move

3. Gap-fill-Resume.... the gap is retraced, then the market resumes the move in the direction of the initial gap.

4. Gap-half fill-Resume... Gap opening is retraced about 1/2 way, the resumes in the direction of the opening gap.

Trader's job is to figure out "which" it is and play accordingly.
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Very good. Do you have any tips on how to figure out which one is occurring, aside from tape reading?
 
pragmatic-trader said:
Very good. Do you have any tips on how to figure out which one is occurring, aside from tape reading?
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Nope. It's a guess.

As for "tape reading"... not valid these days. Waaaayyy back when the most current info players had about a stock was on the ticker tape*. Nowdays we have up-to-the-moment info via real-time charts... or as quickly as price changes can be posted to the electronic ticker.

*Before that prices were manually posted on a big chalk board for all floor players to see. You can imaging the delay from real-time prices. Tickers were a big improvement on that.
 
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Scataphagos said:
Nope. It's a guess.

As for "tape reading"... not valid these days. Waaaayyy back when the most current info players had about a stock was on the ticker tape. Nowdays we have up-to-the-moment info via real-time charts.
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How do we make money fading gaps if it's little more than a guess?
 
Scataphagos said:
"Fading the gap" is one of the plays. Is it right this time? You'll find out later, but "waiting to see what happens" would let you make much money.
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So if you were to trade this strategy, what variables would you look at when deciding whether or not to fade a particular gap?
 
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