How to fade very large gaps up in US equities

Here’s an idea. Take a bunch of historical intraday charts with gaps. Make a rule set, see what results are. If it’s profitable. Try it with small size and compare historical results to live results.

Sounds like a good way to go broke myself. You’ll keep scaling in and be at full position just before you get stopped out or let it run higher and go broke.

 

Good idea to test it. But why do you say it's a good way to go broke? Can't I keep position sizes small and use good risk management? Also I heard of people running this strat before

 

The hard part is when are you wrong? Theirs huge volatility on a big gap up. Either it runs away from your or you get chopped up with stops being hit.

Just my hypothesis.

 

Yeah this is a question I'm hoping to get your advice on how to solve

 

If I was tackling the problem I’d first build a sample of large gaps and try and measure the move from previous day close to the peak before it came back. St dev or ATR of past 20 days give you an idea of the average move up. If theirs a pattern start there.

Another idea is time of day retracement. See if theirs any correlation there.

Perhaps categorize off news vs earnings.

Create a rule set, this amount of risk, 3 entries up until this point, stop is this many st dev from the open, close out at this ATR retrecement, or close at x time. Leave the discretion out of it.

Take another sample and see if the rules offer an edge.

If it can’t return a positive expectancy theirs nothing to pursue, theirs no edge and next setup.

 

Fading large gaps seems to work the best in bear markets, although in the nano or micro caps they often fail. In fact that has always been my bread & butter trade in bear conditions - fade gaps (big or small).

Like you said, when a stock gaps into resistance that is the main factor I look at, I want to see big selling right out of the gate. I was keeping an eye on MRNA today to fade this gap but was busy with other trades.

MRNA had a triangle pattern on the daily chart that would lure in T.A. longs - adding more fuel to the fire of fresh trapped longs that would bail. I pay attention to the Fib levels when fading since they can often turn at the 50-70 levels.