Two Week Gap Study

Dec 22, 2007: 12:26 PM CST

Since December 13th, we have seen six out of seven days provide us with some type of “Gap Fade” tactic to use. Gap fade tactics are extremely profitable and easy to execute using only one “indicator”: Price.

Let’s look:

I have annotated each gap with a blue oval and indicated whether or not (“Y” for fade and “N” for not faded) the gap was filled (or ‘faded’).

Typically, the fill will take place within the first hour of price action, and if the gap has not filled by then, the odds tend to shift to playing “anti-gap” strategies, which actually trade for a larger target in the direction of the gap. Usually these days provide traders with large profits that, when leveraged with confidence, can provide the bulk of the profits for the month.

The gaps that tend NOT to fill are usually a result of a strong momentum/price impulse that cannot be counteracted. Usually, large trend moves begin when one side of the market is so “Squeezed” that they have to ‘bail’ on their positions, and their bailing creates frenzied activity on the winning side.

In the case of December 21st, we can assume initially that the gap occurred (partially) as a result of overleveraged shorts unwinding their positions by covering, and higher prices (and news reports) caused buyers to enter the market (perhaps mid-day or earlier) and force their hand by driving prices higher.

Either way, history has shown that it is best to fade small gaps and trade in the direction of large gaps. This depends on your definition, but a nice filter is 100 Dow points, or perhaps 3% in a given stock (as defined as “large”).

Trading is an “odds game” (probabilities) and the “Gap Fade” techniques utilized are based on nothing more than odds.

Regardless, learning and utilizing this strategy can add profits to your months, and are among the simplest and clearest strategies to use of all. I’ve found that any indicator degrades performance and execution, and it’s best to throw them out on these types of trades and just monitor pure price action as it reacts.

2 Comments

2 Responses to “Two Week Gap Study”

  1. jacksoo Says:

    Thanks for the posts Corey – excellent once again! You talk about trading futures (mini DOW I think you said) can you explain a little further – some examples perhaps. Here’s wishing you and your loved ones a very happy festive season and rewarding new year. All the very best.

  2. Corey Rosenbloom Says:

    Hey Jacksoo,

    No problem! I actually detailed some of my reasons in a post entitled “Why I am Relying More on Index Futures Trading” where I explained why I like the @YM or Dow-Mini contracts. I’ve written various posts on intraday action and ‘idealized trades’ that set-up during the day that I took or looked back on as ‘perfect’ set-ups.

    Happy Holidays and the best of New Years to you and your family as well! Thank you!