I am a gap trader. Specifically, I 'fade' the opening gap (i.e. go short when the gap is up or long when the gap is down). My first research breakthrough many years ago was in recognizing that gap selection was the “door” to making profits and the “key” to that door was to focus on the location of the opening price.
Using the prior day's direction (up or down) and the open, high, low, and closing prices, I created ten “zones” and each provides tremendous insight into the probability of a gap filling or not. Click here to view my Gap Zone Map with historical odds for the S&P 500. My selection strategy has evolved over the years to include market conditions, patterns and seasonality, but zones remain the foundation of my gap fade selection criteria.
Our friend Scott Andrews, a West Point graduate and former CEO of a public company, is now Founder and President of MasterTheGap.com. Today he is going to share an interesting perspective in this article on using historical probabilities. For a limited time to Traders Blog readers, Scott is offering a complimentary historical research study on opening gaps in the S&P 500. If you enjoy this article, you may wish to download his complimentary SPY Gap Study HERE.
Maybe you shouldn’t try to kiss all the pretty girls?
In the timeless words of Sir Winston Churchill, “Those who fail to learn from history are doomed to repeat it."
Though Churchill was not speaking of the markets, the concept is certainly applicable. In fact, the easiest way to make money trading the markets, is to avoid those setups that have been unprofitable historically.
Many folks obsess over trying to trade every winning setup. I do not. I am a gap fader. When the historical probabilities are favorable, I will short ‘up’ gaps and buy ‘down’ gaps. Since more than 70% of all opening gaps have filled the same day historically in the U.S. indices, I do not need to catch every winner to be successful.
Since 2007 when Scott Andrews of MasterTheGap.com started calling out daily gap plays in a live trading room, he has been helping traders learn how to use gap trading to their own advantage. He considers gap trading the "bread and butter" of his trading and even earned the nickname, "Gap Guy" due to his successes.
Today Scott is sharing tips on how to get the most out of your trades by showing you how to discern high expectancy trades from low expectancy trades. We hope you enjoy reading his guest blog post and leave a comment for him below.
This past week I had the great privilege of enjoying lunch with a fellow North Carolinian, Dr. Van Tharp, the world-renown trading coach and author of some of my favorite trading books: Trade Your Way to Financial Freedom and Super Trader. While trying not to ogle over him like a star-struck teenager meeting his favorite musician for the first time, my mind raced with the many pearls of trading wisdom he has espoused over the years.
I recently had the opportunity to sit down to dinner with Scott Andrews from MastertheGap.com, and at the end of the dinner I honestly said to myself, this guy has got something here. Now there's a lot of "gap" research and insight out there, but Scott takes it to a different level. So if you have some time, please read his article, fire away with the comments, and visit his site MastertheGap.com.
If you are looking to become a serious trader, there are two critical questions that you must answer; “What is my primary trade setup?” and “What is my edge?”
When I started out, it seemed like every book, every website, and every trader touted a different setup – each with its own merits. But I knew that I needed a trade that fit “me” and my trading personality. After lots of searching and introspection I settled on fading (i.e. trading the opposite direction of) the opening gap in the indices (e.g. S&P 500, Dow 30, Nasdaq 100, Russell 2000). Not only do opening gaps occur daily and offer significant profit opportunity,but they have an inherent directional bias. In fact, over 70% of gaps will retrace from their opening price back to the prior session closing price that very same day, often in the first hour of trading. Continue reading "Why Fading The Opening Gap Is The Ideal Setup for Me"→