I know it's tempting to take that +5, but then you may be getting back into the scalping frame-of-mind. You're not taking the 5 in order to insulate yourself from an initial stoploss since you'd be at BE on both by that point. So giving it room to flow may be the better choice. This is generally not a problem unless you're entering a phase of NR and WR days, which I suspect everyone would welcome. And since that's always a possibility, best to keep an open mind. And I guess you've noticed that we're coming up against fairly heavy resistance, including H&S resistance on the NQ. Makes things interesting. --Db
db, We're right at the 50% retracement of the 12/2 high and 12/31 low. 1071 area may provide resistance.
I don't pay much attention to that stuff. Price resistance and support hold the trump cards. But either way there should at least be some hesitation here. --Db
Today is an excellent example of why it is so important to have a gap strategy in place as a supplement to the trend-following strategy I've posted here. Unfortunately, I still don't have anything that I can reduce to a set of rules, but I have found that fading the gap, as long as it is more than 1% and less than 3%, is a winning strategy. Entering off the opening high or low, even if they are established in the first few minutes, is a rare loser. More often the trade ends up at breakeven. However, the winners tend to be dramatic, as with today. This particular type of trade centers around having faith in the gap, and I don't know how that faith can be achieved without thorough manual backtesting. That faith, however, enables one to take the leap. This morning, for example, there was a gap down of about 1.5%. Using the same entry and initial stoploss rules I've posted re the trend-following strategy, entry would have been at 1063.5 at 09:34. After reaching breakeven, managing the trade is mostly a matter of leaving it alone until it reaches the target. Doing so would have resulted in a gain of nearly 30 points, whereas waiting for the 30m "breakout" would have yielded only 12 to 14pts, depending on how tight the stop. I don't know if anybody is still following this. If not, that's fine. If so, perhaps we can share ideas on a simple gap-trading strategy, preferably with stats. --Db
Db, I totally agree with you about the importance of having a gap strategy. BTW, I like your >1% but <3% idea. There are days, like today, where waiting for the 30-min breakout is not the best play. Incidentally, I also bought at 9:34 this morning (ES, though, not NQ) and hit my biggest winner of the week.
Actually, it's not exactly mine. I based the criteria on Brandon Frederickson's stats, which showed that the wider the gap, the less likely it was to fill, at least the same day, one reason why it's generally not a good idea to trade in the direction of the gap but rather to fade it. But applying my entry rules meant that very small gaps weren't even worth playing except as scalps, and sometimes not even then. In other words, if the gap were only five or six points, and one didn't enter until the opening high/low had been exceeded by 2pts, there wasn't much left unless one exited immediately once the gap was filled. One might go ahead and do this anyway and be a scalper during the gap trade and a trend-follower for the rest of the day, but so often that first impulse continues to move price once the scalpers have exited (which probably accounts for the usual hesitation at the gap). Of course, one can just enter at a price just above (or below) the opening with some sort of initial loss-limit stop, but I haven't even begun to backtest that sort of strategy. I suspect, though, that gaps of less than 1% would be so minor, particularly at current price levels, that they would amount to noise, especially since the eminis trade overnight. In that case, probabilities wouldn't be working on your side. --Db
Here is the Brandon post 08-25-02 10:19 PM Trading The Gap Most traders could recite hundreds of market cliche's "The trend is your friend", "Cut your losses short", and my favorite of all time "Gaps fill". For a long time I made a decent amount of money fading gaps 9 out of 10 days, but on the 10th I would give everything back I made over 9 days. This was obviously very frustrating - but sometimes frustration is a traders best friend because it leads to research that (hopefully) leads to more consistent profits. My losses led me to a very intense study of gaps. Here are a few of the raw statistics we have compiled. (This study was done on the Nasdaq, all gaps that have occured since Jan 2, 1989, the data is kept current. 71% of gaps will fill on the day they occur. The average gap is 1.17% Smaller gaps fill in more often than larger ones (The exact percents are caclulated as are the odds of any amount of filling in 10% increments for our proprietary money managment systems) Gaps that are twice as large as the average gap (2.34) remain open 61% of the time on the day they occur. Gaps that are 3 times larger than the average gap remain open 65% of the time on the day they occur, while gaps that are 3.5% larger than the average gap are left unfilled 89% of the time on the day they occur (only 21% of them are filled on the week they occur too, fwiw). Given the above dry data we have developed systems that have us fading small gaps aggressively and average gaps but not as aggressively as well as tading in the direction of large gaps. We have a 100% rules based approach (ie system) in place for the managed accounts we do with eLocaltrading, and a discretionary approach is applied in the chatroom. Over the next few week or two I would like to show the Bliss system to the traders on ET. I will post the Bliss generated traders here along with charts and a brief expliation so that hopefully a few people will be able to better understand trading in the first few minutes of the day, a time when most traders get absolutly shredded. I find this to be my best (most consistent) system, and usually I am done by 1045 CT. I hope everyone enjoys the thread and any discussion that may come as a result. Please feel free to ask any questions. As long as it does not get into things that might effect the money managment program I will tell you anything you want to know. In general any info about trading the gaps I will be open with, but some of the specifics of what generates the mechanical system, the targets and stops it uses etc I wont be as open with. Enjoy, Brandon