master the gap h1 2 literature

8/6/2019 Master the Gap H1 2 Literature

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February 16, 2010

New York Traders Expo

Scott Andrews

Ten PatternsEvery Gap Trader

Should Know


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Copyright 2010, Master The Gap, Inc.

DisclaimerThis material is intended for educational purposes only and is

believed to be accurate, but its accuracy is not guaranteed. Tradingand investing has large potential rewards and large potential risks.

You must be aware of, and fully understand, these risks and bewilling to accept them in order to invest in equity, futures, options,currencies and other financial markets. Do not trade with money

that you cannot afford to lose. This material is neither a solicitationnor an offer to buy or sell equities, futures, options, or currencies.

No representation is being made that any account will or is likely toachieve profits or losses similar to those discussed. The past

performance of any trading system or methodology is notnecessarily indicative of future results.

Use this information at your own risk!!


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Agenda

Gap Basics

How I Trade Gaps

Risky Patterns

Supportive Patterns

For More Info...


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The most common definition is thedifference between

a security's opening price and its prior dayclosing price.

This difference shows up visually on a pricechart as an open space or gap.

What is a Gap?


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What Does a Gap Look Like?


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Close of prior day

Next day gap down Opens at $47.61 Fills the gap exactly

$48.38

Example of Gap: Daily Chart


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Example of Gap: 5 Min Chart

Next day

opening price(9:30 am ET)

Prior dayclosing price(4:00 pm ET)

Price retraces

& fills gap


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Fact: Over 70% of allopening gaps have filled

the same day.

(but the losses from 30% thatdidn't fill, equaled the profits from

the winners)


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The key to making moneyfading opening gaps is

SELECTION

(i.e avoiding most of the losers)


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How I Trade Gaps

1) Focus onSELECTION

2) Enter at the open

3) Hold for gap fill or beyond(rarely scale out prior to fill)

4) Use a LARGE enough stopenough to let probabilities work(~30% of 5 day ATR)


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How I Select Gaps To Trade


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My Opening Gap Trades(Sep, 2007 to Feb, 2010)

(Note: trade number includes scaling out, actual # of gap

trades = ~200 total)

Actual TradeStation-generated report forsmall, trading account (~$50k starting)

Only opening gap trades

Trade plan specifics (i.e. long/short, target,and stop) were posted online for each ofthese trades for members prior to openingbell and prior to trade entry

Trades were entered at 9:30 am EST

There is no assurance that my performancewill continue

Your results will vary, perhaps substantially,depending on many factors


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Definitions

u Fade: to trade in the opposite direction of the gap

u Gap Fill: when price retraces from the open to theprior day's close (regular session)

u Win %: percent of opening gaps that, if faded at the open,fill the gap or end the day profitable

u Winner: I successively faded this gap

u Good Call: I passed on this gap setup

u ES: E-mini S&P futures

u QQQQ: Nasdaq 100 ETF


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Risky Patterns


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Gaps Following False Down Days

Up gaps following false 'down' days willconfuse and trap some traders


Direction is downbut close is

ABOVEclose of

2 days ago

UpGaps

Higher close


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Direction is downbut close isABOVEclose of

2 days ago



Source: ES: 1999 2008; QQQQ: 2003 - 2008

Win % ES QQQQ

UpGaps 64% 66%

Down

Gaps71% 88%


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March 25, 2009: Good Call


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Direction is upbut close is

BELOW

close of2 days ago

Down

Gaps

Lower close

Gaps Following False Up Days

Down gaps following false up days willconfuse and trap some traders



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Gaps Following False Up Days

Direction is upbut close isBELOW

close of2 days ago



Source: ES: 1999 2008; QQQQ: 2003 - 2008

Win % ES QQQQ

UpGaps

79% 65%

Down

Gaps65% 64%


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Ex: Gap following false up day

April 7, 2009: Good Call


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Gaps Opening Below S1 Pivot

Down gaps beyond S-1 often indicates a change of marketsentiment & will run stops placed just beyond this key level


S-1

Openingbelow

Daily S-1

DownGaps


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Gaps Opening Below S1 Pivot



OpeningbelowDaily S-1

S-1

Source: ES: 1999 2008; QQQQ: 2003 - 2008

Win % ES QQQQ

UpGaps n/a n/a

Down

Gaps55% 60%


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May 21, 2009: Good Call

Gaps Opening Below S1


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Gaps Opening Above R1 Pivot

Up gaps beyond R-1 often indicates a change of marketsentiment & will run stops placed just beyond this key level

Up gaps beyond R-1 often indicates a change of marketsentiment & will run stops placed just beyond this key level

R-1

OpeningaboveDaily R-1

UpGaps


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Gaps Opening Above R1 Pivot

Gap beyond R-1 often indicates a change of marketsentiment & will run stops placed just beyond this key level

Gap beyond R-1 often indicates a change of marketsentiment & will run stops placed just beyond this key level

OpeningaboveDaily R-1

R-1

Source: ES: 1999 2008; QQQQ: 2003 - 2008

Win % ES QQQQ

UpGaps 62% 59%

Down

Gapsn/a n/a


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Ex: Fade of gap opening above R1

April 24, 2009: Stopped Out


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Gaps Opening BelowLow of Prior Up Day (BLUD)

Longs will be caught off guard and cover theirpositions while new short sellers jump in too


Below Low

of Up Day

Down

Gaps


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Gaps Opening Below Low of PriorUp Day (BLUD)

Below Lowof Up Day

Source: ES: 1999 2008; QQQQ: 2003 - 2008



Win % ES QQQQ

UpGaps

n/a n/a

Down

Gaps53% 55%


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Ex: Gap opening in BLUDzone

April 20, 2009: Good Call


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Supportive Patterns


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Gaps Following 3 Higher Lows

After 3 successively higher lows and a gap higher,profit taking is more likely


ThreeHigher

Lows

Fade UpGaps


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Gaps Following 3 Higher Lows

Win % ES QQQQ

UpGaps

85% 83%

Down

Gaps72% 74%



HigherLows

Source: ES: 1999 2008; QQQQ: 2003 - 2008


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Ex: Fade of gap

following 3 higher lows

May 7, 2009: Winner


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Gaps Opening Higher

Than High of 2 Days Ago

A gap down that opens above the high of 2 days prioris likely to attract more buyers of weakness


Fade DownGaps


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Gaps Opening Higher

Than High of 2 Days AgoWin % ES QQQQ

UpGaps

75% 77%

Down

Gaps80% 83%

Above highof 2 daysago



Source: ES: 1999 2008; QQQQ: 2003 - 2008


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Ex: Fade of gap down

opening abovehigh of2 days ago

April 3, 2009: Winner


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Gaps Opening Lower

Than Low of 2 Days Ago

A gap up that opens below the low of 2 days prioris likely to attract more sellers (dead cat bounce)


Low

of 2 daysago

Fade UpGaps


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Gaps Opening Lower

Than Low of 2 Days AgoWin % ES QQQQ

UpGaps

80% 79%

Down

Gaps69% 77%



Source: ES: 1999 2008; QQQQ: 2003 - 2008

Below lowof 2 daysago


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Ex: Fade of gap up opening lower

than low of 2 days ago

February 24, 2009: Winner


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Gaps Following Large Unfilled Up Gaps(> 20% of 5 day ATR)

> 20% of5 day ATR

Gaps following a large gap that failed to fill aregood fades because the market will often consolidate


Fade Up& Down

Gaps


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Gaps Following Large Unfilled Up Gaps(> 20% of 5 day ATR)

Win % ES QQQQ

UpGaps

86% 82%

Down

Gaps84% 80%

> 20% of5 day ATR



Source: ES: 1999 2008; QQQQ: 2003 - 2008


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Ex: Fade of gap following

large unfilled up gap

March 24, 2009: Winner


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Gaps Following Large Unfilled Down Gaps(> 20% of 5 day ATR)

> 20% of

5 day ATR



Fade Up& Down

Gaps


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Gaps Following Large Unfilled Down Gaps(> 20% of 5 day ATR)

Win % ES QQQQ

UpGaps

80% 73%

Down

Gaps82% 89%

> 20% of5 day ATR



Source: ES: 1999 2008; QQQQ: 2003 - 2008


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Ex: Fade of gap following largeunfilled 'down' gap

May 14, 2009: Winner


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Risky Patterns

Up Gaps

Following false 'down' days

Opening above the daily R1 pivot

Down Gaps

Following false 'up' days

Opening below the daily S1 pivot Opening Below the Low of an Up Day


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Supportive Patterns

Up Gaps

Following 3 higher lows

Opening below low of 2 days ago

Following large, unfilled 'up' gaps

Down Gaps

Opening above high of 2 days ago Following large, unfilled 'up' gaps

Following large, unfilled 'down' gaps


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Next Steps


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For More Info

Check out www.MasterTheGap.com

Buy the book: Understanding Gaps

at www.TradersPress.com

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