Trading gaps is not for everyone. But for me, I consider the opening gap, the ideal trade setup. They occur almost daily, offer plenty of profit opportunity, and are normally short term in nature (1-2 hours). Gap trading offers many other compelling benefits including:
- Gaps have an inherent bias and edge: over 72% of all gaps in the S&P 500 futures market have filled the same day over the past ten years.
- They occur frequently (three to four tradable gaps per week in the S&P) so I am not reliant upon catching that “one big winner” to achieve my monthly goals.
- It’s an easy trade to learn and play. No need to “time” the entry – just use a market order at the open.
- I can prepare in about 15 minutes before the market opens each day. No need to scan hundreds of stocks at night.
- I can trade them without charts and from anywhere.
- Getting filled with minimal slippage is not an issue –especially in highly liquid markets like the equity indices and futures markets (S&P 500, NASDAQ 100, etc.).
- The target is pre-defined so I don’t have to manage the trade after placing it (though sometimes I do to maximize profits).
- My risks are controlled and limited to a small percent of my account. No overnight risk.
- Gap trades work in bull and bear markets equally well. I don’t need to predict the market’s next move.
- They occur in most asset classes (equities, futures, currencies, etc.) and can be traded using stock, options, and futures contracts.
- I can grow my account several percent per month on average, and often more with this single, simple setup using just one market. No need to baby-sit lots of different markets waiting for that perfect, entry-sensitive trade to appear.
- Understanding the bias of the market before and after the gap fills, provides a trading edge for the rest of the day while also helping optimize my entries on swing and position trades.
I am not the only one who recognizes these many benefits. James Altucher, in the first chapter of his book, Trade Like a Hedge Fund, states:
“The gap trade is the bread and butter trade for many day traders and hedge funds.”
The opening gap in the S&P futures is the single most significant daily event in the global equity markets. It is, therefore, arguably the most important trade of the day. Because I trade the E-Mini S&P 500® futures for a living, most of my examples and research are based upon this index. However, the fundamentals of gap trading shared in this book can be applied to gaps in any market.
Contents:
– WHAT ARE GAPS?
- The Basics
- How To Use & Profit from Gaps
- The Promise of Gaps
- The Paradox
– CREATING A PROFITABLE STRATEGY
- Gap Size
- Gap Zone
- Seasonality
- Stop Size
- Target Optimization
– REAL WORLD EXAMPLES
- How I Trade Gaps
- Gap Fade Examples
- “Go With” Example
- “Fade the Fill” Example
– GAP TRADING TIPS
Understanding Gaps: Profiting from the Opening Gap By Scott Andrews pdf
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