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Opening Gap Trade


The Regular Trading Hours (RTH) opening gap trade is a well known trading setup. This trading setup is certainly something I always consider at the opening of the new RTH trading session.

Guy did an analysis of this setup in his article titled "Fading the Gap"

From his article we learn the following historical statistics from the sample period he used...
  • "On average 76% or three quarters of all gaps close at some point during RTH."

  • Gaps on Monday were the least likely to fill and Thursday gap openings the most likely.

  • Opening gaps up to 7 ES points in size were filled during the session at least 70% of the time. This probability drops off surprisingly quickly above the 7 ES point range.

Given these basic concepts as a foundation, I thought it might be helpful to use this topic for further discussion, analysis and trading ideas.
Cool, thanks for the hints!
Has anyone ever tried fading the gap fill? It's called a gap fill bounce. If the gap gets filled, just fade it to the tick, use rather tight stops, pick up a few points, and be happy. I've done it once, and seen it done 3 times, but haven't had the chance lately.
Anyone?
Have you run any back tests on this piperian? It has some logic to it because your entry point is a typical target for gap fade traders.
quote:
Originally posted by piperian

Has anyone ever tried fading the gap fill? It's called a gap fill bounce. If the gap gets filled, just fade it to the tick, use rather tight stops, pick up a few points, and be happy. I've done it once, and seen it done 3 times, but haven't had the chance lately.
Anyone?



I prefer to use the gap fill event as a profit target.

My intuition says the gap fill "to the tick" is not going to hold very often, my guess less than 30% of the time. I would need additional confirmation from other techniques to initiate a counter-trend or reversal trade at the exact close of the previous day's trading session. For example, if we see the close and the VAH sitting in the same general area (within a few ticks), then we have something more meaningful to consider as an action level on a gap fill into that price zone.
PT EMINI what software did you do for the study? Excellent work. Did you do any study regarding overnight rane? Thank you. khant@cox.net
over night range
quote:
Originally posted by khant99

PT EMINI what software did you do for the study? Excellent work. Did you do any study regarding overnight rane? Thank you. khant@cox.net



guy (daytrading) did the study, I believe he wrote his own custom application to sort through the torrent of historical data to produce the statistics.

I have not done (or seen) any study relating the overnight range
to the opening gap trade. I do use the overnight high and low as meaningful price resistance and support price levels at the open of trading.
I didn't realize that khant99 was talking about my gap study
- For the most part I used RTH data and Excel to do the stats. When I needed to do some complicated data manipulation or calculations I wrote some code to help me.
Hi I just joined this forum and it has a lot of good info in it. I found it by searching on trading the opening gap. I got interested in gaps from reading John Carter's book - seems like a very high percentage play. Can I ask you a few questions:

1) I should be able to use this with either ETF's such as QLD/QID (2xQQQQ/inverse 2x QQQQ), or else QQQQ options, correct? I have been paper trading by buying straight call or put options and it has achieved the target about 5 times now.

2) Do you have any further research results since your paper "Fading the Gap"? (Great paper!)

3) I have been using the play as described by Carter with one difference:instead of buying at the open as he does, I wait for a reversal, then get into the trade when I know it is going in the right direction to fill the gap. I am figuring this helps eliminate the number of trades where the market takes off and never looks back, and not filling the gap. Does this seem reasonable to you?

Any help appreciated, thx Mike
quote:
Originally posted by mdszj

Hi I just joined this forum and it has a lot of good info in it.

Welcome to the forum and thanks for the kind words.
quote:
1) I should be able to use this with either ETF's such as QLD/QID (2xQQQQ/inverse 2x QQQQ), or else QQQQ options, correct?

In theory yes, the gap play should work in any market based on Market Profile value area theory - I'll mention more on that below.
quote:
2) Do you have any further research results since your paper "Fading the Gap"?

Unfortunately not. I started a much deeper book-type investigation into this but never completed it. It's currently on the back burner.
quote:
3) I have been using the play as described by Carter with one difference: instead of buying at the open as he does, I wait for a reversal, then get into the trade when I know it is going in the right direction to fill the gap. I am figuring this helps eliminate the number of trades where the market takes off and never looks back, and not filling the gap. Does this seem reasonable to you?

That certainly seems reasonable and you're protecting yourself against the gap-and-go scenario. One of the uncomfortable and illogical results of testing the gap is that the back test that I did demonstrated that the best results came when you don't use stops. However not using stops is too dangerous so there's a bit of a catch-22 situation there. (As an aside, Trade the Markets (John Carter's company) have licensed the Gap Fade material from this web site to use in their training.)

One of the reasons that the gap trade frequently works is because when we have a gap we're outside of the Market Profile Value Area and the market "wants" to trade back to the value area.

One part of the gap study that I did not address when I did it was to compare the gap to the distance from the point-of-control and the value area to test if the market was more likely to fill the gap under these different scenarios:
  • Open is outside of Value Area (VA) and previous Close is in VA

  • Open is in VA and so is previous Close

  • Open is in VA and previous Close is outside of VA

  • Previous Close is within 1 point (or small amount) of point-of-control (POC).

It would appear logical to me that the gap would have a higher probability of filling if the previous close was very close to the POC. This is something that I don't think that anybody's ever tested and something that I want to test in the future.
great gap play in the ES today. Huge rally sold near the R2 pivot to watch it gap fill and then some.WOOT!