Gap Fade Works Two Days in a Row!

Feb 21, 2008: 10:16 AM CST

It’s nice to see the market is returning to the classic gap fade pattern working. February has been a rough month for those who love to Fade the Gap according to classical trading, yet January was a very rewarding month for this strategy.

Let’s look at the recent action, including a bonus chart:

Although both gaps faded, neither faded according to the ideal strategy.

Yesterday’s gap experienced a period of consolidation before breaking sharply higher. My guess is that just before noon, if you entered a classic gap-fade trade, then you exited due to a time stop component just before the large volatility move up to your target, which was extremely frustrating.

Today’s gap experienced a bit of further upside in price before the gap fade trade achieved its goal. The stop wasn’t triggered, unless you were an ultra-conservative trader, but most likely you gave price just a little leeway this morning to see the first few minutes of action, and actually may have gotten a more favorable price for execution.

I can’t wait to run the statistics for February and see the percentage of days with an overnight gap, and then the percentages of times the gap closed according to the classical gap fade technique. My guess is that the success rate of the classic technique will be under 50%, after being 70% for January.

As always, when you finally discover the key, the market immediately changes the lock!

2 Comments

2 Responses to “Gap Fade Works Two Days in a Row!”

  1. Thomas Says:

    What is the classical gap fade technique? I have been trying to get more information on gap fade but did not find much on the internet.

    Thanks in advance.

  2. Corey Rosenbloom Says:

    Thomas,

    There are a variety of methods to trade opening gaps, but the classical method is entering an order to fade the gap, with a target of yesterday’s close. There are different methods to place stops, but generally they’re placed just beyond the opening price.

    When the gap closes (assuming it did), then exit your initial trade and shift to play (trade) in the direction of the gap for at least the morning’s opening price.

    The perfect gap trade is a two-prong trade that is solely price based. Feel free to search this blog for the term “gap fade” to learn more.