I've not looked at gaps seriously, but one would need to have a basic understanding of the following, IMO to trade them effectively: -What % of gaps up are closed during a down trending market (and what is the average time to close) -What % of gaps up are closed during up trending markets (vs time) -What % of gaps down are closed during down trending markets -What % of gaps down are closed during up trends
Today, two large gaps of liquid stocks have been HD and CVX, they have worked perfectly. It seems a good strategy, someone has experience in this type of trading?
Here's a strategy you can try to back test. Only play gaps which are at least 3 ATR away from yclose. Position size to Martingale all the way up/down to yclose at 1ATR intervals. This will also determine max gap you will trade measured in ATRs. The first part buy/sell at open in the direction of the gap. If it goes in your direction, trail stop at 1/2 ATR off the high. If it goes against you, Martingale as described above. By the end of the day either close the loosers or keep for the next day's dead cat bounce.
Just hit the sim and try it. Looks easy but markets move fast, the first chart moved with direction of gap, the second chart moved opposite of gap... If you can find a positive expectancy with gaps then your ready to go. If you think your just flipping coins then good luck.
%% Exactly; a series of gaps are even better. Also named windows, because windows are made to be opened + closed.