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reres

Trading the Opening Gap

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All last year I ran a custom automated system I wrote in EasyLanguage that faded the opening gap on YM. It made some money but I ultimately stopped trading it because I decided it needed some more work. That was last fall. I should probably revisit it.

 

In a nutshell, I found trading the opening gap tricky. Over the years the psychology of the gap changes and thus, you must be wary of this. Back testing shows that specific setups seem to come into favor then fade. In short, what will work over the next 18 months may not work so well after that. So, you must be on guard to shifting sentiment.

 

Going from memory…Monday was the worst day to fade a gap. I skipped fading gaps on Mondays. The larger the gap, the less likely it was to fill.

 

I considered a small gap on YM between 10-45 points. Target was full gap fill. Large gaps were defined as between 46 to 60 points and my target was 50% gap fill. Gaps larger than 60 were not traded.

 

Stops for were placed at 1.5*gap_size from the entry. Thus a 20 point gap would have a 30 points stop.

 

Once a trade was on, I never moved the stop or target. Price would either hit my stop, the target or be closed out at end-of-day, 1500 Central time.

 

I should probably dig up my notes and studies I did and post it. That's item #256 on the to-do list!

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hey thanks for ur input.

 

i have been monitoring DAX and FTSE gaps. they seem to close many times, so i guess you just need to know when to trade them using some helpful indicators like TICK readings and volume. speaking of that....does anyone know where to get tick reading for dax. i found for dow jones but cant find for EU futures

Edited by Soultrader
link removed and post edited according to TL! Forum Guidelines

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It's not my thing but I know someone who has done a lot of back testing and research on ES opening gaps. (I won't plug him here as his blog is now a paid service).

 

He pays a lot of attention to categorizing gaps on size and how that relates to the previous days price action. (up/down day gap in upper/lower of yesterday range or gap from range etc.)

 

It should be possible to come up with a profitable strategy for FTSE and DAX but it will require a lot of work with back testing.

 

Good luck.

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I agree with Harlequin. If you want to gap fade DAX and/or FTSE you must spend a lot of time back testing the probabilities of those gaps filling and not filling. It will be important to note…

 

How big is the gap

Where is it in relation to yesterdays, open, high, low, close

The day of the week (this can make a difference!)

Does it open near a pivot?

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I have software that i bought from tradethegap.com (I think it was from there) I don't see it offered anymore. Anyway it produces reports and tells you the % of gap fills and % of gaps fills etc.

 

I find it pretty usefull.

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Hey Reres,

 

I tried trading gaps on ES for awhile and didn't like it at all. It felt like a "Pay and Pray" trade. Yeah, it's supposed to be a high probability trade. I always felt like it was a desperation move: enter the trade and wait, wait, ignoring any other signals or order flow for as long as it takes to hit one of your exits. For me, it is much more comfortable to have a strategy that is based on more than just, "it closed here yesterday and now opened lower here, so buy."

 

If you burn enough time, you can probably come up with a winning strategy, something you'll have to trade EVERY DAY to get it to pay. It'll have so many conditions, it'll basically be a discretionary system.

 

You might look at the EuroStoxx 50 (FESX) for gap trading if you're awake in your part of the world when it opens. I've watched a number of gaps close on it during the first hour of trading.

 

Good trading,

 

Bam-Bam

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Hey Reres,

 

I always felt like it was a desperation move: enter the trade and wait, wait, ignoring any other signals or order flow for as long as it takes to hit one of your exits. For me, it is much more comfortable to have a strategy that is based on more than just, "it closed here yesterday and now opened lower here, so buy."

 

 

Bam-Bam

 

well, this is what im after. i dont wanna trade just based on historical data. i want to include as many indicators as possible into this to make the trade not 60% but rather 85% sure. so far i saw tick readings and volume help as indicators but i was thinking to include some more fundamental things, especially seeing where market makers are positioned in the morning, pivots, previous day action, market sentiment, and fundamental news coming out the current day.

 

i have been trading news only so far and i make my living out of it, but i got often problems with brokers, and its making me lazy so i wanna focus now more on probablity trading patterns...maybe sth will work out

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It doesn't hurt to have the odds in your favor. Here is a sample report for the last two years. It uses exchange time. The time frame is 8:28 open and a 3:00 close. the fill is 80%.

 

It took me a while to figure out why most traders lose and why i was losing. I believe that we all think that there must be a better way, yet if we happen to find it we never think it is good enough and try to change it, ignore it, or not believe it. It took me a while to not only realize this, but to truly adopt it. Trading is hard not because of the markets, but because of our own hangups," Its all in your head". Master yourself and you will master trading. For me I'm still working on it.

 

 

 

 

1-Minute TTG GAP ANALYSIS REPORT for @ES from 2007/4/23 to 2009/4/23

 

Minimum Gap of 1.00 and Maximum Gap of 5.00 pts

A gap is considered closed if 80% of the Gap is filled

 

Number of days tested: 517

 

Number of gaps found: 181 (GapUp: 107, GapDn: 74)

Number of gaps filled: 151 (GapUp: 92, GapDn: 59)

Percent gaps filled: 83.4% (GapUp: 86.0%, GapDn: 79.7%)

 

Gaps filled on:

 

Mondays 30/44 68.18%

Tuesdays 23/27 85.19%

Wednesdays 35/39 89.74%

Thursdays 34/38 89.47%

Fridays 29/33 87.88%

 

Time Period GapUp GapDn %GapsFilled

 

929 - 930 3 1 2.6%

930 - 931 15 13 18.5%

931 - 932 3 1 2.6%

932 - 933 7 2 6.0%

933 - 934 12 0 7.9%

934 - 935 2 2 2.6%

935 - 936 4 3 4.6%

936 - 937 2 2 2.6%

937 - 938 1 4 3.3%

938 - 939 6 1 4.6%

939 - 940 1 0 0.7%

940 - 941 2 1 2.0%

942 - 943 3 1 2.6%

943 - 944 0 1 0.7%

944 - 945 1 0 0.7%

945 - 946 1 2 2.0%

946 - 947 1 1 1.3%

947 - 948 2 1 2.0%

948 - 949 1 0 0.7%

950 - 951 0 1 0.7%

951 - 952 0 1 0.7%

952 - 953 2 0 1.3%

953 - 954 0 1 0.7%

954 - 955 1 1 1.3%

956 - 957 2 1 2.0%

957 - 958 1 0 0.7%

958 - 959 1 0 0.7%

1000 - 1001 1 0 0.7%

1002 - 1003 0 1 0.7%

1003 - 1004 1 0 0.7%

1005 - 1006 0 1 0.7%

1006 - 1007 1 2 2.0%

1008 - 1009 0 2 1.3%

1009 - 1010 0 1 0.7%

1010 - 1011 1 0 0.7%

1014 - 1015 0 1 0.7%

1024 - 1025 1 1 1.3%

1026 - 1027 1 0 0.7%

1030 - 1031 1 1 1.3%

1032 - 1033 0 1 0.7%

1035 - 1036 2 0 1.3%

1036 - 1037 0 1 0.7%

1039 - 1040 1 0 0.7%

1046 - 1047 1 0 0.7%

1050 - 1051 0 1 0.7%

1106 - 1107 1 0 0.7%

1133 - 1134 1 0 0.7%

1139 - 1140 0 1 0.7%

1214 - 1215 1 0 0.7%

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Food for thought - Lets say the market has opened for an hour. One time frame buying for the next 3 five minute bars follows. What will you do after seeing this?

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