HowITradeGaps 030213

How I Use Historical Probabilities to Trade the Opening Gap
Scott Andrews
Copyright 2013, MasterTheGap.com
Disclaimer
This material is intended for educational purposes only and is believed to be accurate, but its accuracy is not guaranteed. Trading and investing has large potential rewards and large potential risks. You must be aware of, and fully understand, these risks and be willing to accept them in order to invest in equity, futures, options, currencies and other financial markets. Do not trade with money that you cannot afford to lose. This material is neither a solicitation nor an offer to buy or sell equities, futures, options, or currencies. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed. The past performance of any trading system or methodology is not necessarily indicative of future results..
Use this information at your own risk!!
Agenda
The Basics How I Trade Gaps Selection Criteria Execution How To Get More Free Research
Gap Basics
What Does a Gap Look Like?
GAP
Example of Gap: Daily Chart
Close
$48.38
Next day gaps down Opens at $47.61 Fills the gap precisely
Example of Gap: 5 Min Chart
Next day opening price (9:30 am ET) Prior day closing price (4:00 pm ET)
Price retraces & fills gap
The Easiest Trade of The Day

1. 2. 3. 4. 5. 6. 7. 8. Gaps have an inherent bias and edge (70% win rate). Can prepare in minutes before open. Can trade them without charts from anywhere. Minimal slippage due to opening volume. Fire & forget place order and walk away. Entry & target are pre-defined, no need to manage Risks are limited and controlled - no overnight risk. They work in bull and bear markets equally well no need to predict the markets next move.
Definitions
u
Fade:
to trade in the opposite direction of the gap
Gap Fill: when price retraces from the open to the prior day's close (4:15 pm ET) Win %: Profit Factor: ES: ATR: percent of opening gaps that, if faded at the open, fill the gap or end the day profitable ratio = gross profits from winning trades gross losses from losing trades
E-mini S&P futures Average True Range (the average range of each session, inclusive of opening gaps)
The Promise of Gap Fading

Year
2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 Total:
Number of Gaps
227 243 228 236 235 223 203 194 205 204 228
Win %*
69% 67% 71% 69% 68% 64% 73% 72% 71% 76% 74%
2,426
70.4%
* January 1 - April 30, 2008
*Win % is based upon hypothetically fading opening gaps > 1 point in the E-Mini S&P 500 futures, 2002-2012, targeting prior close, exiting end of day if gap did not fill. This not a recommended strategy.
The Paradox
Year
2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 Average:
January
Profit Factor*
1.10 1.01 1.20 1.21 0.88 0.72 1.04 1.13 1.17 1.38 1.21
1.10 (yawn)
*Based upon hypothetically fading opening gaps > 1 point in the E-Mini S&P 500 futures, 2002-2012, 1 targeting30, 2008 exiting end of day if gap did not fill. This not a recommended strategy. - April prior close,
Profit factor = total profits of winners / total losses from losers
Though an extremely high win rate, the profits from the winners barely exceed the losses from the losers.
Using Stops Does NOT Improve Profitability

Stop As % of Gap Size
25% 50% 75% 100% 125% 150% 175% 200%
% Win
20% 35% 45% 51% 57% 60% 62% 64%
Average Win/Loss Ratio

4.1 2.0 1.3 1.0 .80 .70 .65 .60
Profit Factor
1.04 1.07 1.03 1.05 1.05 1.05 1.05 1.05
*Based upon hypothetically fading opening gaps > 1 point in the E-Mini S&P 500 futures, 2002-2012, targeting prior close using a stop = % of gap size. This not a recommended strategy.
Note: 1998 2007, E-Mini S&P 500 futures.
Regardless of stop size, fading all gaps remains a breakeven strategy.

The Key to Profitability:
SELECTION
How I Trade Gaps
Select Trades Like John Venn
Trade only when the majority of historical criteria are supportive

Copyright 2012, Master The Gap, Inc. Copyright 2013, MasterTheGap.com
How I Select Gaps to Fade

Pattern Market Condition
$
Zone
Seasonality
I analyze each gap based on its opening zone and how it has performed historically under similar scenarios
Gap Zones
Definition: location of the gap relative to the prior days key price levels: Open, High, Low and Close.
High Close
Open Low
Location, location, location applies to gaps too!
Why Gap Zones Work

High They inherently incorporate: Support and resistance Short term trend Gap size Trader psychology Close
Open Low
Direction of Prior Day Should Be Considered Too

Open Close
Close
Open
Prior day direction incorporates the short term trend.

Gap Fade Win % By Gap Zone

Win % 55% 62% 73% Prior Day Prior Day Win % 65% 84% 75%
81% 66%
70% 53%
Win % is based upon hypothetically fading ~2,500 opening gaps > 1 point in the E-Mini S&P 500 futures, 2002-2012, targeting prior close, exiting end of day if gap did not fill. This not a recommended strategy.
Tip: Avoid Gaps That Open Below the Low of an Up Day

Prior Day
AVOID!
BLUD Gaps!
Entry Timing
Why I Enter At The Open

Simplifies execution Minimizes emotion Takes advantage of rookie psychology (i.e. those chasing the market) Easier to back-test Focuses the effort on the system (not me) Catches all of the winners...
Stop Placement
The Stop Dilemma

Stop As % of Gap Size
25% 50% 75% 100% 125% 150% 175% 200%
% Win
20% 35% 45% 51% 57% 60% 62% 64%
Average Win/Loss Ratio

4.1 2.0 1.3 1.0 .80 .70 .65 .60
Profit Factor
1.04 1.07 1.03 1.05 1.05 1.05 1.05 1.05
*Based upon hypothetically fading opening gaps > 1 point in the E-Mini S&P 500 futures, 2002-2012, targeting prior close using a stop = % of gap size. This not a recommended strategy.
Using small stops does not improve profitability due to the reduction in win rate.
Stops
25% 40% of a five day ATR (avg. true range) works well for most market / equities depending upon the volatility of the security 50 80 cents in the SPY or 5 8 points in the E-mini S&P 500 has worked well historically If I increase stop size to accommodate volatility, then I always reduce position size to ensure my max loss per trade is not exceeded I never hold losing trades overnight
Stop size is more of a personal preference than profitability determinant

Results of My Called* Gap Trades: 2011-2012

113 wins 56 losses, 3 scratch ~ 67% win rate ~ 1.28 profit factor (ratio of profits to losses from all trades)
* Each was posted at Todays Gap Plays page on the website for members prior to the opening bell and prior to my entry.
Individual results vary. There is no guarantee that I or my methodology will enjoy similar success in the future.
Summary
Historical probabilities level the playing field between the Pros and the Joes Gap selection is THE key Know the zone! Entering at the open has many benefits Use a stop size that fits you & your desired win rate
Thank You
Go to:
www.masterthegap.com/tradingpub
for a copy of the slides and a BONUS video:
8 Gap Facts Every Trader Needs to Know
If you would like to learn more about: Gap Trading using Historical Probabilities Join me at MasterTheGap.com or consider
Master Gap Trading

Premium DVD Series
The Opening Gap DVD set
Two hours on 2 studio recorded DVDs & 1 CD
Profit from the Opening Gap DVD set

Three hours on 3 studio recorded DVDs & 1 CD
Regular price: $495, available through March 15th:
$97 total ( use coupon code: pay97 )
30 day money-back guarantee if not fully satisfied
www.masterthegap.com/tradingpub

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How I Use Historical Probabilities to Trade the Opening Gap

Copyright 2013, MasterTheGap.com

Use this information at your own risk!!

Copyright 2013, MasterTheGap.com

Copyright 2013, MasterTheGap.com

Copyright 2013, MasterTheGap.com

What Does a Gap Look Like?

Copyright 2013, MasterTheGap.com

Example of Gap: Daily Chart

Copyright 2013, MasterTheGap.com

Example of Gap: 5 Min Chart

Price retraces & fills gap

Copyright 2013, MasterTheGap.com

The Easiest Trade of The Day

to trade in the opposite direction of the gap

Copyright 2013, MasterTheGap.com

The Promise of Gap Fading

* January 1 - April 30, 2008

Copyright 2013, MasterTheGap.com

Profit factor = total profits of winners / total losses from losers

Using Stops Does NOT Improve Profitability

Average Win/Loss Ratio

Note: 1998 2007, E-Mini S&P 500 futures.

Regardless of stop size, fading all gaps remains a breakeven strategy.

The Key to Profitability:

Copyright 2013, MasterTheGap.com

How I Trade Gaps

Copyright 2013, MasterTheGap.com

Select Trades Like John Venn

Trade only when the majority of historical criteria are supportive

How I Select Gaps to Fade

Why Gap Zones Work

Copyright 2013, MasterTheGap.com

Direction of Prior Day Should Be Considered Too

Prior day direction incorporates the short term trend.

Gap Fade Win % By Gap Zone

Tip: Avoid Gaps That Open Below the Low of an Up Day

Copyright 2013, MasterTheGap.com

Why I Enter At The Open

Copyright 2013, MasterTheGap.com

The Stop Dilemma

Average Win/Loss Ratio

Stop size is more of a personal preference than profitability determinant

Results of My Called* Gap Trades: 2011-2012

8 Gap Facts Every Trader Needs to Know

Copyright 2013, MasterTheGap.com

Master Gap Trading

Profit from the Opening Gap DVD set

Regular price: $495, available through March 15th:

$97 total ( use coupon code: pay97 )

30 day money-back guarantee if not fully satisfied

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