Gap Fades

Discussion in 'Strategy Building' started by redeye5, Jul 5, 2008.

  1. maxni

    maxni

    Thanks for your detailed reply, gnome.

    In your long experience of trading bear markets, do you find that gap fades are, on balance, high probability trades provided there aren't signs that a tradable rally has begun?

    Further, how do you pick a decent entry point for such trades?

    Thanks again.
     
    #11     Jul 5, 2008
  2. I've been working on a premarket gap strategy for four years. Here are my statistics for my best yet strategy.

    Gap down short 61%
    Gap down long 74%

    Gap up long 73%
    Gap up short 84%

    Provided you wait for the correct signal:D
     
    #12     Jul 5, 2008
  3. guy2

    guy2

    Subsequent to writing that material, Trade the Markets (John Carter and Hubert Senters) have licensed the gap material from Fading the Gap to teach their students.
     
    #13     Jul 5, 2008
  4. gnome

    gnome

    1. On some gaps, it's correct to chase. On others, fade. No simple rule.

    2. Take a guess.. just like any other trade.

    And if you're playing for "signs of a tradable rally has begun".... you have to guess at that too. One of the great traps in trading is to presume you know more than you actually do.
     
    #14     Jul 5, 2008
  5. It depends on why there is a gap. Gaps with no news to back them up are more likely to fail then Gaps based on major reports that came out at 8.30 or because of earnings, or fed action etc. Also understand that gaps on the last day of the month or qtr or first day of the month or qtr behave differently.

    Rather then look at it in terms of how big the gap is try to look at it in terms of why there is a gap. Carter used premarket volume on certain stocks to try to understand if the gap is real or not. I wouldn't use those same stocks he used. They are outdated and are not as important as before. I feel its more important to try and understand the news that is driving the gap rather then use premarket volume on certain stocks.

    Spend time learning what time of news is meaningful and what news will garner a bounce but is really bogus and will end up failing.
     
    #15     Jul 5, 2008

  6. I agree, it would seem logical that the more specific the underlying, the more necessary it is to understand why the gap exists. If you're trading an index and there is no 'major' market information or cause then I think its reliable that you can benefit from the statical fact that most entities do close their day to day gap.

    If you want to trade individual equities, I think you need to be on the look out for events and causes for gaps - more so than indexes. Its also helpful to have some confidence in the equity, that it has a history of closing gaps, or at least not failing to close the gap with huge move in the other direction.

    Gaps are a great play, as long as you don't fall asleep at the wheel. Like John Carter, who's book I really enjoyed, if the situation is not absolutely ideal, then skip the trade. This is easy if you're gap closing on equities because there are lots to choose from.

    Let me know how you do. Nice SN by the way.

    Redeye
     
    #16     Oct 11, 2008
  7. Another thing I thought of after I wrote the other post is that you may want to try gap fills on ETFs. Never looked at doing this, but they may be reliable.


    Redeye
     
    #17     Oct 11, 2008
  8. gnome has it once again.
     
    #18     Oct 11, 2008