Gap Fade Becomes Bear Flag
Today’s trading so far has been a dream come true for me. My two favorite patterns have played themselves out ultra-cleanly and as close to text-book as you can get.
Let’s see what I mean:
Earlier, I pointed out the Gap Fade Trade the market gave us like a gift this morning. The market wasn’t finished giving – that’s for sure.
The second set-up of the day came in the form of a rather massive and sudden bear flag which rose just above moving average resistance.
I describe more detail about this set-up in my educational post “How to Trade Bull and Bear Flags.”
As much as I have learned through education and experience, it seems strange that these two extraordinarily simple patterns and set-ups have made me the most money in my account this year.
I keep wanting all these esoteric and complex strategies and indicators to make it worth what I have learned about them but it often pays for retail traders to stick to simple knowledge and set-ups.
The more you see these patterns play out, the more confidence you’ll have in yourself when you perceive a pattern unfolding and you will join in with less hesitation.
Each time you see a clean or interesting pattern you recognize, print out the chart at the end of the day, annotate the pattern, and keep a ‘hard copy’ folder (or file) that gives you easy access to all the times you’ve observed the set-up.
I’ve looked at all gaps that open above the prior day highs and over the past 10 years, I have found 240+ gaps that fade down to the open and 120+ that do not fade down to the open. Minimum Gap of 1.5 ES points and max gap of 15 ES points.
Overall if you fade every gap Up and Down over the past 10 years, you would be successful at a 63% clip.
Based on your post yesterday, I found that gaps that open over the prior day high can be faded at a success rate of 2 to 1.
Over the past 10 years in the ES. There have been approximately 391 gaps over prior day highs. When you add minimum and maximum qualifiers on the size of the gaps (1.5 min and 15 es point on the highs), about 240+ gaps fade down to prior day close and 120 do not.
So it’s a bit hard to say that the probailitites are not on your side if something gaps up over the prior day highs.
And I’ve also noticed that if you take all the gap ups and downs and fade them, you would have been successful about 63% of the times.
Now I’m not sure how John Carter increases his odds to 80%. He said on the things he looks for is the premarket volume. I have not found this to be substantive enough to change any of the percentages.
I think I must be the only person on earth losing money today… I swear, Google (GOOG) is KILLING me! I thought for sure it would’ve bottomed out by now and starting an upswing. What do you think?
Hey Lee 🙂
Google is one of those high-fliers that makes and loses you money quickly. It may be showing signs of renewed life, and I actually did a post for you today showing the key chart points to be aware of on Google, and I think it has some upside but it needs to prove itself.
Thanks for stopping by!
LP,
Excellent statistics! I’ve been looking to compile those for some time now but don’t have the programming skills in TradeStation to do so yet (though I’m doing the tutorials!).
I thoroughly enjoy the gap-fade play because of the dual-edge possibility it gives: First from achieving its profit target more % than its stop and Second from gaining more on the wins verses the losses.
I’m not sure how Carter does what he does either, but perhaps he looks at historical volume for the open verses today’s open or maybe the breadth or what not. I’ve seen him trade live in person, but on those days, there were no gaps to trade. He does well in person, too.
Thank you for the data and feel free to provide more as well.