Notes on Daily Gap Guides

The MTG Gap Guides show the historical results for fading (i.e. trading in the opposite direction of) the opening gap for each market based upon Gap Zone and three distinctly different sets of criteria: Market Condition, Patterns, and Seasonality.  By analyzing each day's gap setup with three different methodologies, greater insight and confidence can be achieved while maintaining sample sizes and statistical integrity.

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).  Pattern analysis considers whether any of the riskiest patterns of my top 400 patterns for gap fading triggered at the close of the prior day.  Seasonality analysis utilizes day of week (Monday, Tuesday-Thursday, or Friday), calendar day of month, and trading day of month.

The data from these three approaches can be used to create your own Gap Trading Plan based upon probabilities, not possibilities. For example, you might choose to only fade the gap when all three criteria are showing a high probability setup for that day. Or, you may choose to allocate 1/3 of your position size based upon each of the three methodologies.

The Gap Guide probabilities are based upon the maximum data available for each market, a minimum of ~7 years / ~1,500 trading days.

Key assumptions used for creating the historical results:

• The gap fade was entered precisely at the open of the day/session (9:30 am ET) for all markets
• Trade was closed at the prior day closing price (settlement) OR at the stop size shown OR at the end of the regular session (4:15 pm ET for Futures and 4:00 pm for ETFs) - WHICHEVER occurred first.
• Assume a minimum opening gap size of 1pt (ES), .5 pts (TF), 2.5 pts (NQ), 10 pts (YM),  10 cents (SPY and DIA), 5 cents (IWM and QQQQ).
• Exclude all gaps greater than 1 x 5 day ATR for each market in order to minimize the chance that an unsually large gap fade winner distorts the historical Profit Factor for a given setup.
• Account for commissions, but not any potential slippage.

Yellow denotes 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.

PLEASE NOTE:  The historical data provided in the Gap Guides and elsewhere on this site is for educational and informational purposes only.  Using this information should be done with great caution and at your own risk.  The best results will be achieved by using this data in conjunction with other entry and exit techniques.

Definitions

"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 "settlement" price and this sometimes varies slightly from the "last trade" of the prior session.

"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 my pre-market comments.

“Gap Fill” assumes the gap fade trade was closed upon price trading at the prior day's closing/settlement price (regular trading hours / pit session).

“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 (**) e.g. 5**.  The minimum stop used for each market:  5 pts (ES), 50 pts (YM), 12.5 pts (NQ), 2.5 pts (TF),  50 cents (SPY & DIA), 25 cents (IWM & QQQQ).  The maximum stop size for each market:  12 pts (ES), 120 (YM), 30 pts (NQ), 6 pts (TF), 1.20 (SPY & DIA), 60 cents (IWM & QQQQ).    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 very similar due to the larger average win/loss ratio of the bigger gaps. 

“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.    

U.S. Government Required Disclaimer: Commodity Futures Trading Commission. Futures, options, and spot currency trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This website is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. 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.