gap trading history of the major candlestick...
TRANSCRIPT
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Copyright 2012, Master The Gap, Inc.
Special Webinar for TraderPlanet
Scott Andrews
Gap Trading History
of the
Major Candlestick Patterns
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Copyright 2012, Master The Gap, Inc. Copyright 2011, Master The Gap, Inc.
Disclaimer
This material is intended for educational purposes only and is believed to be accurate, but its accuracy is not guaranteed. Trading and investing have large
potential rewards and large potential risks. You must be aware of, and fully understand, these risks and be willing 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 solicitation
nor an offer to buy or sell equities, futures, options, or currencies. No representation is being made that any account will or is likely to achieve profits
or losses similar to those discussed. The past performance of any trading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN
ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING
MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
Use this information at your own risk.
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Agenda
Gap Basics
Gap Trading History of the Major Patterns
How I Trade Gaps
For More Info...
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The most common definition is the
difference between a security’s opening price and its prior day
closing price.
This difference shows up visually on a price chart as an open space or “gap.”
What Is a Gap?
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What Does a Gap Look Like?
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Examples of Gaps: Daily Chart
Unfilled
Gaps
Gap up filled
Gap down
filled
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Close of Nov 11
• Nov 12 gaps down • Opens at $47.61 • Fills the gap exactly
$48.38
Example of Gap: Daily Chart
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Example of Opening Gap (5 Min Chart)
Next day opening price (9:30 am ET)
Prior day closing price (4:00 pm ET)
Price retraces & fills gap
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Example of “Fading the Gap”
Go long at open (note: if gap were ‘up’ you would short)
Price finally fills gap
Target prior day closing price
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Copyright 2012, Master The Gap, Inc.
SPY Testing Parameters
Timeframe: • Historical data: 10 years (~ 2,500 trading days)
• Dates: 2002 - 2011
• Session time: 9:30am ET to 4:00pm ET
Trade Criteria: • Gap size: 10 cent minimum
• Entry: Market order at 9:31am ET (fade the open)
• Target: Gap fill (previous day’s close)
• Exit: at end of day (4:00 pm ET) if gap did not fill
• Commissions and slippage per trade: none
Copyright 2011, Master The Gap, Inc.
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Copyright 2012, Master The Gap, Inc.
Fade: to trade in the opposite direction of the opening gap. i.e. short ‘up’ gaps and buy ‘down’ gaps
Gap Fill: when price retraces from the open (9:30 am ET) to the prior day's closing price (4:00 pm ET) Win Rate (%): percent of trades that hit their target without first being stopped, or finish the day profitable
Profit Factor =
hypothetical gross profits from winning trades
------------------------------------------------------------- hypothetical gross losses from losing trades
Key Terms
If the Profit Factor (PF) is > 1
the setup has made money historically
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SPY “End of Day” Gap Fill Probabilities
About 70% of opening
gaps will retrace back
to the prior close
the same day they occur
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How to use this data
Improve your position entries
Improve your exits
Intraday trading
Can be used with SPY, ES, or related stocks and indices
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Candlestick Pattern
Gap Fill Stats
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The Doji - Uptrend
Up gaps 40/57 (70%) / 1.9 PF
Down gaps 46/66 (70%) / .8 PF
Shorting ‘up’ gaps after a doji during
an uptrend has been very profitable
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The Doji – Downtrend
‘Down’ gaps after a doji during
a downtrend have been more profitable, but less likely
Up gaps 31/48 wins (65%) / .9 PF
Down gaps 17/25 wins (68%) / 1.3 PF
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Bullish Engulfing
Gaps in both directions after a bullish engulfing pattern
have shown a bearish bias
Up gaps
4/5 wins (80%) / 2.5 PF
Down gaps 3/7 wins (43%) / .3 PF
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Bearish Engulfing
> 90% of gaps following a bearish
engulfing pattern have been to the upside
Up gaps 14/20 wins (70%) / 1.0 PF
Down gaps 2/2 wins (100%)
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Hammer
After a hammer, ‘up’ gaps have been riskier for fading
Up gaps 17/26 wins (65%) / .6 PF
Down gaps 14/19 wins (74%) / 1.0 PF
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Hanging Man
Fading gaps in either direction following a hanging man
has been unprofitable
Up gaps 19/32 wins (59%) / .8 PF
Down gaps 23/33 wins (70%) / .6 PF
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Piercing Pattern
Down gaps following a piercing pattern
have been more likely and more profitable
Up gaps 2/4 wins (50%) / .5 PF
Down gaps 9/11 wins (82%) / 2.9 PF
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Dark Cloud
‘Up’ gaps after a dark cloud have been more likely
Up gaps 7/9 wins (78%) / 1.1 PF
Down gaps 2/3 wins (67%) / 3.8 PF
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Bullish Harami
‘Down’ gaps after a bullish harami
have been more likely and more profitable
Up gaps 17/25 wins (68%) / .7 PF
Down gaps 26/34 wins (76%) / 2.2 PF
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Bearish Harami
‘Up’ gaps after a bearish harami
have been more likely and more profitable
Up gaps 23/27 wins (85%) / 1.9 PF
Down gaps 13/21 wins (62%) / .6 PF
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Morning Star
Fading ‘up’ gaps after a morning star
has been very profitable
Up gaps 5/6 wins (83%) / 7.2 PF
Down gaps 2/3 wins (67%) / 1.0 PF
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Evening Star
Fading ‘up’ gaps after an evening star
have been very profitable too
Up gaps 8/9 wins (89%) / 2.2 PF
Down gaps 2/2 wins (100%)
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Bullish Kicker
‘Up’ gaps after a bullish kicker have been riskier
Up gaps 6/11 wins (55%) / .9 PF
Down gaps 11/17 wins (65%) / 1.1 PF
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Bearish Kicker
‘Up’ gaps after a bearish kicker have been
much more likely and more profitable
Up gaps 19/26 wins (73%) / 2.0 PF
Down gaps 7/8 wins (88%) / 1.1 PF
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Shooting Star
‘Up’ gaps have been less likely,
but more profitable after a shooting star
Up gaps 6/7 wins (86%) / 1.6 PF
Down gaps 9/15 wins (60%) / .7 PF
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Inverted Hammer
‘Up’ gaps after an inverted hammer
have been more likely and more profitable
Up gaps 13/19 wins (68%) / 1.6 PF
Down gaps 8/12 wins (67%) / .6 PF
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Trading the gap can be extremely lucrative if you have
a clear and proven edge…
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Actual Equity Curve vs S&P 500 (2007 to 2010)
Probability-based gap trading works in bull and bear markets
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How I Select Gaps To Trade
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