Basics of Gap Guides
Basics of Gap Guides
Click the play button to watch a 32 minute video on the Basics of Gap Guides
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Click the play button to watch a 18 minute video on the Basics of Today's Gap Play Worksheet
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- Historical testing: Based on the prior 10 years of historical data (if available) for each market. All markets have at least 8 years / ~1,700 trading days of data.
- Futures: ES (S&P 500), YM (Dow 30), NQ (Nasdaq 100), TF (Russell 2000)
- ETFs: SPY (S&P 500), DIA (Down 30), QQQQ (Nasdaq 100), IWM (Russell 2000)
- Entry time: 9:30am ET
- Commission included but slippage is not included.
- Exit: Trade was closed at the prior day closing price ("last trade") OR at the stop size shown OR at the end of the regular session (4:00 pm ET for both Futures and ETFs) - WHICHEVER occurred first.
- Stop = 30% of 5 day ATR or applicable min/max per market
- Minimum/Maximum Stop Sizes:
- YM: 50 points/120 points
- NQ: 12.5 points/30 points
- TF: 2.5 points/9 points
- SPY/DIA: .50/1.20
- QQQ/IWM: .25/.90
- Minimum Gap size:
- ES: 1 point
- YM: 10 points
- NQ: 2.5 points
- TF: .50 points
- SPY/DIA: .10
- QQQ/IWM: .05
- Maximum Gap size: 1 x 5 day ATR
- Yellow highlighted areas denote that the results for that specific zone are based upon a sample size of less than 10 and may be less reliable than other probabilities. Trade with caution, if at all.
- Market Condition - Analysis includes four proven (proprietary) criteria that measure the "market mood" for the short term (past 2 weeks) and mid term (past 8 weeks).
- Patterns - Analysis focuses on the prior three days price action.
- Seasonality - Analysis utilizes day of week (Monday, Tuesday-Thursday, or Friday) and short term trend (rising/declining).
- O,H,L,& C - these letters on the far left column of each Gap Guide table represent the prior day's Open, High, Low and Closing prices for each market (regular trading hours: 9:30-16:15 EST for futures, and 9:30 - 16:00 EST for ETFs). These key price levels are used to delineate the 5 potential opening zones for the next day/session. Note: the closing price is the "last trade" price on a 5 minute chart and this sometimes varies slightly from the "settlement" price shown on a daily chart.
- Gap Zone - each potential opening gap zone is labeled with the nomenclature from the Gap Zone Map and is used for reference purposes. On days that the zones all start with "U" that represents that the prior session closed "up" (i.e. higher) than it opened. Those that start with "D" represent that the prior session closed "down" (i.e. lower) than it opened. If a market closed precisely as the same price it opens thereby forming a doji candlestick on a daily chart, the system defaults to showing "D" zones and the corresponding probabilities are less reliable. Note: on occasion a market will close higher/lower than it opened but on a closing basis it may close in the opposite direction. For example, if SPY closes at 110, then gaps up and opens the next day at 112 and then sells off and closes at 111, the system would consider this a "Down" day since it closed lower than it opened - even though it still closed higher than its prior day. I watch for these anomolies since they add risk for gaps in the opposite direction of the prior open - close direction. These days are called "False Down Days" or "False Up Days" in Scott's pre-market comments.
- Gap Fill - assumes the gap fade trade was closed upon price trading at the prior day's closing price.
- Ext. Target / Extended Target - equals gap fill (prior day close) + 15% of the ATR in the opposite direction of the opening gap. For example, if a gap occurred in the U-H zone (i.e. above the high of a prior “up” day) then the gap fade trade would be to short the opening gap and the extended target would be 15% of the ATR beyond (i.e. below) the gap fill price.
- ATR - is the Average True Range for the prior 5 days and is based based upon the cash index for the futures markets and for the actual ETF for each ETF. ATR is calculated by measuring the distance between the extreme high and low of a day, including the prior closing price (if it is beyond the day's trading range). By incorporating the prior day close, a more accurate measurement of a market's daily movement can be determined since the overnight gaps are included. ATR is a useful calculation for measuring the volatility of a market and adjusting targets & stops.
- Stop - value shown is 30% of the current 5 day ATR except when the market volatility is unusually small or unusually large. In these instances, the stop is noted with double asterisks (**) and the minimum/maximum stop size per market is displayed. e.g. 5**. This is the figure that was used to generate the historical probabilities and is not a recommended size stop. You should adjust your stop size based upon your risk tolerance, account size, and trading style.
- Win % - is the historical percentage of all opening gap fades - in that zone - that hit the target or finished the day profitably without first hitting a hypothetical stop price equal to 30% of the ATR (or the min/max stop if applicable). Win % is a blended average, so the smaller gaps in this zone have a slightly higher average win rate and the larger gaps have a lower win rate. Regardless, the profit factor is normally similar due to the larger average win/loss ratio of the bigger gaps. Note: If Win % = 0 then the filter condition has never occurred, or is has never resulted in a winner.
- PF - is Profit Factor. It represents the historical gross profits generated by the winning trades divided by the historical gross losses of the losers. A profit factor greater than 1.0 means the strategy has a positive historical net profit. The bigger the PF the more profitable it has been to trade historically.
Scott's Gap Terms:
BLUD Gap: A gap that opens "Below Low of an Up Day." As the name implies, it is generally a difficult zone in which to play gaps since it is the only zone without a strong natural bias to fill.
Buffalo Trade: This is a trade where price action almost hits the target, then reverses and becomes a loser. Or, this is a trade that goes against me and stops me out, just before turning into a winner. The key to remember is that any trade with the word "Buffalo" in its description, is always a frustrating loser. (My apologies to Buffalo sports fans!)
Cowboy Gap: These are gaps that open "up" but below the daily low of 2 days prior AND between the open and close (the candle body) of a prior down day (red candle). This generally high probability gap fade setup is akin to a "dead cat bounce" and occurs within D-OC zone shown in the daily Gap Guides. It works well because the two day pattern is bearish. I call it the Cowboy gap trade because you need to ride it like a "bucking bronco" since it is prone to bouncing around (rallying) quite a bit after the opening bell before it fills the gap. I will sometimes use a slightly larger stop on these setups to acomodate this volatility. There is a presentation that I did for SFO magazine on this setup at their website and in the members download area of MasterTheGap.com. The reverse or sister setup is the Heat Gap - see below.
False Down Day: Yesterday's close was less than yesterday's open, but yesterday's close was greater than the close of the prior day.
False Up Day: Yesterday's close was greater than yesterday's open, but yesterday's close was less than the close of the prior day.
Gap-n-Go / Go With / Follow: This is a trade where you "follow" the gap by trading at the open in the direction of the gap (as opposed to fading it.) Gaps into some zones increase the likelihood of a continuation or breakaway gap and therefore are less likely to fill and may be candidates for “going with” the gap.
Gapper: A unique individual that has evolved beyond his/her trading peers by recognizing the superior return on time, effort and capital of the "gap fade." This elite trader can often be recognized by his/her enviable lifestyle and finances :)
Heat: This is a slang term for "adverse excursion" which describes how far (points) a trade moved away from my desired direction before becoming a winner. This is a good statistic to track for all trades.
Heat Gap: These are gaps that open "down" but above the daily high of 2 days prior AND between the open and close (the candle body) of a prior up day (green candle). This generally high probability gap fade setup occurs within U-CO zone shown in the daily Gap Guides and works well because the two day pattern is bullish in nature. I call it the Heat gap trade because it is prone to bouncing around quite a bit (i.e. selling off some) after the opening bell before it fills the gap. I will sometimes use a slightly larger stop on these setups to accomodate this volatility. There is a presentation that I did for SFO magazine on this setup at their website and in the members download area of MasterTheGap.com. The reverse or sister setup is the Cowboy Gap - see above.
Otis: "Otis" is the name of my gap trading and back-testing system. I named it after my late, great-grandfather Otis Shepard of Farmville, Virginia. Papa Shepard was a hard working, unassuming, rock-steady entrepreneur who was loved by all that knew him. When he died, he left me his wedding band which I still wear everyday (inscribed with his and my great-grandmother Pearl's initials and their wedding date: 12-20-1917) and his blue blazer that fits me perfectly and that I often wear to church. Pretty cool.
Regular Trading Hours / Pit Session: This term is synonymous with the “open outcry” or pit session hours for a given market, e.g. 8:30 – 15:15 CST for the S&P 500 pits in Chicago. Many markets trade nearly 24 hours a day electronically; however, the bulk of volume is transacted during their “regular” trading hours. For this reason, the regular session's open, high, low, and closing prices carry great significance for most traders and their systems.