Trading Large Gaps

A

ang_99

Does anybody trade large gaps as a primary strategy. I've been
using this strategy for a while with success, although I do give a lot back when I get stupid and don't cut losses quick, but thats
another story. I either sell into large gap up, buy into large gap up looking for momentum, sell into large gap down looking for continued sell off or buy looking for a rebound. I wait till 10:00 to try and get better idea of direction. I just find its such a simple strategy that works and works well when you have a small account that your trying to build up because you get a lot of volatility. Of course the key is cutting your losses quickly, still struggling with that though. Its nice because you can have more losers than winners and be way ahead. Sometimes I feel that its such an elementary way of trading that people classify me as a loose cannon whose account will blow up eventually. Anybody trade this popular strategy with a lot of success?
 
one of my friends trade that way, but he trade only large gaps down. i did backtesting for him and it seems to be very market dependend. another word-you can't do this in bull market.
anyway-it can be backtested and from there you will have and idea how well(or not) it works:D
 
I use gaps in cash indexes as a secondary strategy. I trade NQs only, and I must admit it works very well. I found that combining gaps with other indicators (not off-the-shelf ones) increase probability of success: some gaps I don't trade at all, some of them are good continuation patterns, some are excellent (short-term) selling signals.

DVB
 
Quote from ang_99:

Interesting, I guess not many people trade this way....:cool:
More...

Your thread has been up what 2-3 hours? Everyone has been trading till 4:00 so you don't get many posts, you get some responses. A lot of us trade gaps profitably.

Couple of gap threads around here as well.
 
Quote from ang_99:

...I either sell into large gap up, buy into large gap up looking for momentum, sell into large gap down looking for continued sell off or buy looking for a rebound. I wait till 10:00 to try and get better idea of direction. I just find its such a simple strategy...

Anybody trade this popular strategy with a lot of success?
More...

Hmmm,

I don't see an actual strategy here...what are your specific entry signals ???

Do you use indicators or are you strictly a price action only trader when trading GAPS ???

Are you talking about stocks, futures or what ???

You said its popular...I think I've heard dozens of strategies with specific trade management rules for entry, initial stop/loss managment, trailing stop management, profit targets and contingency plans...

All easy to follow and simple...

Your description of what you use seems very close like an "intuition trade".

Do you trade inside GAPS and outside GAPS differently. ???

The problem is most traders don't have the discipline to follow the trading plan.

It's possible there's more to it but you were just trying to keep it brief.

Also, there has been several GAP strategies discussed in-depth here at EliteTrader.com

They may be of interest to you...you can use ET search menu to find most.

NihabaAshi
 
I backtested EOD gap up and gap down data to find optimum entry and exit points for trading such stocks at the next day's open. The analysis showed which trigger points were optimal for going long and short on these stocks. For example, if a stock gapped up more than 10% the first day (one of my criteria, along with float, volume, etc.), then on the 2nd day, the best long entry and exit points were 3% and 4.5% above the opening price, respectively, for a 1.5% gain. By "best," I mean, those trigger points with the highest winning to losing %. For my picks, winners to losers ratio was about 6:1 if you bought at 3% above the open (sort of a momentum play) and strictly sold after an additional price rise of 1.5%. This seems alright, but it gets complicated once you factor in ATR (which tends to be large for such "in-play" stocks) and try to set your stop loss. Keep in mind that, for the ones that trigger at 3%, some never make it to the 4.5% exit point. Sometimes, they retrace a little, and sometimes they take a huge dive. In the latter case, you can wipe out all your modest 1.5% winners with one bad loser. I set up this scheme mechanically with mixed results.

Turns out that, statistically, gap ups are more likely to trade down the following day (dip after breakout). If you can short it, it's a better play. Gap downs are different. I haven't collected enough data to analyze gap downs properly.
 
Gap strategy by itself is very primitive. You can easily mislead yourself; thats why gap and trap rhyme. But nevertheless it could help in a learning cycle to become a serious trader.

Now gap data is still an essential if side element in my system consisting of a number of elements .. because it is just one ingredient. You need to know when the gap by itself (small or large is not the key determining element - and that can be often - in whats going to happen).
 
cheese, why does gap have to be a trap? Isn't that why traders
use stop loss, so you don't get traped on the wrong side of
the trade? Isn't that the best way to get volatility which something a lot of traders need.

ang - who is trying to understand and become a better trader.
 
Ang 99, well, I'm not against stoplosses; if you are stoplossed out on a gap play then a gap has become a trap.

But yes I'm with you on becoming a better trader for anyone who wants to become a better trader.
 
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