No problem! I don’t know if I’m becoming an expert on this, or if the market is just being overly generous!

Just like I said to Wolverine, the cut-and-dried answer is to tie it to the target. Maybe with a larger gap, try for a 3 to 1 reward risk (such that if I play for $1.00, then I’ll give up $0.33 of a stop away from entry). I generally don’t let it get that far, because I’m far more likely to kill a trade than try to give it the benefit of the doubt, but that’s not the right thing to do, so I try not to teach what I do. It’s kind of that “do as I say, not as I do” notion where you really need to give the trade breathing room.

But I know that – with the exception of this market – a Dow gap greater than 100 points has lower odds of filling than one of less than 100. For that reason alone, I may use a tighter stop of 20 cents or so beyond the intraday high/low (which is generally too tight).

Oh gosh, you know I’ve tried almost everything but I’ve found the simplest things work the best. I brought that up briefly in my most recent front-page post, but I’ve found that trying to tweak the basic strategy degrades it for me. You really need to enter quickly and play for the target, and IF you are stopped out convincingly, it often pays to flip the position and play for a larger target IN the direction of the gap (because gaps are impulse moves). That’s really what I do.

I do not recommend using stochastics, RSI, CCI, MACD (not even the 3/10 setting that I love so much), ROC, moving averages. None of that matters. All that matters is yesterday’s close and whether or not current price is moving towards or away from that zone. That sets your target and that’s all you need.

You could look at the size of the current 15-minute bar in relation to the previous 7 or more 15-minute bars, or perhaps do the same with 30-minute bars if the gap hasn’t yet filled, and perhaps compare volume. The TICK, TRIN, and Breadth can serve as confirmation, but honestly every time I’ve seen a gap, I’ve seen immense disparities in Breadth that close when the gap is faded. I keep up the TICK, TRIN, and Breadth on all intraday charts but I’ve been relying on them less now than I used to in the past.

I don’t do much back-testing either anymore and so I need to do so. Still, I reference that the simple strategies work best, and trying to tweak them may degrade them.

I’m open to any suggestions from anyone!

I am most comfortable with the Dow Jones Index, and I’ve watched it ever since I was a very young boy, so I understand the numbers and the 30 stocks that make it than the other indexes. I now exclusively trade the DIA and the Dow-Mini futures contract when it comes to US Indexes. If I’m more confident with the ETF/market gap, I’ll play out my bias with the Dow Mini for added leverage.

I usually wait to see a couple of clues if the gap will fade and if it’s already heading up, I join and place my stop beyond the intraday low so as to manage risk. If somehow I miss the gap, or am ‘freaked out’ by it and it’s already filled halfway, or to such a point where my stop would leave me with a 1 to 1 risk to reward (or worse), then I pass on the trade and try not to berate myself.

I try not to advocate (teach) a hard stop rule, because I separate over conservative and overly aggressive traders based on personality. I tend to be over-conservative and that’s my fault I deal with. What I do with my trading, I might not recommend for everyone because others should take more risk (larger stop) than I do.

But still, it comes down to the profit target and expected profit. Try to go for at a minimum of a 2 to 1 reward to risk.

Yes, a couple of days ago, I was victim to this and was sweating it out and ready to kill my trade but forbade myself (I’d done that way too many times) and decided not to micromanage, and when I was about to kill the trade… it rallied and achieved its objective. You never know what’s going to happen in the market and each day seems unique!

Thanks

I have compiled the quick stats you requested on the most recent front page post.

Thank you for the question and the inspiration.

If DOW gaps more than 100 points, how do you usually set your stop?

From your gap fade experience, is there anything one should look out for to stack the probability higher that the gap will indeed fade? Such looking at volume or anything other technical indicators?

Found your blog because of these gap fade articles. So far I’m really enjoying your analysis and I’m learning a lot. Keep up the good work.

Do you trade DIA exclusively on these trades? If SPY, QQQQ, and DIA all gap, which one(s) will you trade?

Also happy to see more info today about how you set your stops. I tried a gap fade with QQQQs today, but overmanaged it; I scratched after I saw shooting stars print in the 2nd and 3rd bars/5′ charts. (And on cue, the market took off as soon as I bailed. I hate it when that happens.) It ended up retesting the low before bouncing, similar to your 1′ chart of DIA posted a few days ago. (Which I also read today, too late to help me on this mornings trade. D’oh!). Do you trail your stop after moving it up to the intraday low, or is that one move all you make?