Close V Opening Gaps

[TheDude 10]

Has anyone got any stats for the probability of a market closing the gap between yesterdays close and todays open?

 

I did a backtest on ES M0. I used the Globex RTH close which occurs 15 mins after the cash close. I disregarded whether the open was inside or outside of yesterdays range. Out of 80 days of data:

 

Gap closed during Initial Balance (60min) 16 days

Gap closed after Initial Balance 26 days

Gap not closed 22 days

Gap too small (<3 points) 16 days

 

If we disregard the days where the gap is too small/not tradable, we get:

66% days will close the gap, 59% of these days will close it after IB periods

34% will not close the gap.

 

Has anyone looked into this in other markets, or have the facility to automate such a test on a wider sample of data? :missy:

 

I thought this could be an interesting topic, but in no way intended to conflict with JPearls valuable contributions around Market Stats.

[WorldTrader 10]

I have not looked at it on the ES, but it seems in Forex it always fills right away. So, this is a good Sunday night strategy. Also, I have seen where two pairs, say the EURUSD and the GBPUSD, which are highly correlated, one gaps and the other does not. You can bet that the other pair will move as if it gapped. This gives you 2 chances to make money on the same gap.

 

I welcome others thoughts on this. Wish I could program someting to give me backtest results on this.

[Tams 20]

maybe you can test Half Gap for higher profit probability?

 

Half Gap

http://www.traderslaboratory.com/forums/f46/half-gap-7738.html

 

37.19:4

[TheDude 10]

Thanks for that Tams.

 

I'd imagine that the half gap would have a higher probability, but would it be that much better? If we consider a gap to be a sign of excess, or minus development, then 'in theory' if the gap gets halfway, it 'should' go the whole way as the buyer/seller who created the gap are no longer/less active at that price. There could be a counter auction or pull back at the half gap point, but this could simply be fib traders coming in.

 

Having said that, I think these findings I posted are just something to be mindful of when in a trade. e.g. yesterdays close could now be a useful level to monitor if in a trade as a target/scale point.

[Tams 20]

Thanks for that Tams.

 

I'd imagine that the half gap would have a higher probability, but would it be that much better? If we consider a gap to be a sign of excess, or minus development, then 'in theory' if the gap gets halfway, it 'should' go the whole way as the buyer/seller who created the gap are no longer/less active at that price. There could be a counter auction or pull back at the half gap point, but this could simply be fib traders coming in.

 

Having said that, I think these findings I posted are just something to be mindful of when in a trade. e.g. yesterdays close could now be a useful level to monitor if in a trade as a target/scale point.

 

you are only describing some of the contexts which might create a gap...

[Tams 20]

your prev post allude to probabilities,

 

then there is room for additional experiment to find out if...

 

1) if a half gap (of a percentage of gap) would produce a higher probability of profit?

albeit a smaller profit amount at each instance?

 

2) if it is possible to combine a higher frequency strategy with MM to produce a run when the market prevails?

[TheDude 10]

Good point Tams. After all, if there is a higher probability of half gap fills, its probably easier to make more money through position sizing - although risk would also increase accordingly if we assume we pick a stop where the market proves us wrong. To my thinking, that point of reversal confirmation will be the same for both full or half gaps - if we use technical levels which to my thinking would make sense as we are using technical levels (full or half gap) to potentially exit. If we have a R ratio for each trade of 1:2 as a criteria, then we will get less opportunities perhaps?

 

Sorry, I don't understand your 2nd point.

[BlowFish 10]

Seems like it would be worth looking at the gap not closed days. If one could find some behaviour to filter some of these whilst not keeping you out of too many good trades you might be on to something. Things to look at (random ideas) are perhaps time (x% gaps close within y hours), internals (gaps don't close if directional move and high $tick or uvol/dvol), simple price action (gaps dont close after a NR day) there are loads to be honest.

 

You could look at other percentages (apart from 50%) but I guess you are getting into curve fitting.

 

One thing that occurs to me if price goes 10+ points against you before closing a 3 point gap it might be a rather uncomfortable to trade. You might want to take a look at MAE (maximum adverse excursion). linked to this is GAP and go days...when do you throw in the towel (stop out).

 

I would be inclined to look at the time factor beyond simply IB not IB.

[TheDude 10]

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Edited June 29, 2010 by TLAdmin
removed referenced spam link

[TheDude 10]

I see what you mean BlowFish.

 

At the moment, Im just interested in the stats, with no plan to turn it into a system as such, but rather gauge the probabilities if I am in a trade.

 

Take today as a fine example of what you said by days when the gap doesnt close. As the probability is for the gap to close, the days when it doesnt should provide some pretty big opportunities as they suggest that the market is out of balance. I guess Taleb would call these the tails when the market is out of kilter - MP just happens to help us ID these more easily IMO.

 

Today we opened well outside of yesterdays range, with an overnight/pre-open range. We know from MP theory that yesterdays value has been rejected. Will the open accept the new level by rotating, then perhaps falling further, or will it reject the open and close the gap? Watching the first minutes of trading, and seeing it stay below the pre-open range, it becomes apparent this ain't stop running ready for a rejection & gap close. There is only one way....

 

Oddly (this was chance, not skill), I had my target at 37.50 So far that is todays low. Did I get a fill? Of course not!!!