Gap trading tips

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Gap trading tipsGap Trading Tips

*** Learn more about probability-based quant trading at investiquant ***

Know the zone! Where the gap opens relative to prior day support and resistance (e. g. Open, High, Low, Close) will greatly influence its probabilities of filling, as well as the optimal placement of your stop and target.

It’s a three legged stool. To maximize success, focus on gap selection, stop placement, and target optimization. It takes all three.

Don’t try to kiss all the pretty girls (or guys)! With gap trading, it pays to be selective. So, when in doubt, sit it out.

The return may not be worth the risk. Just because a gap is small and has a high probability of filling does not mean that it is worth trading. Profit expectancy, not probability of winning, is the key.

‘Tis the season! Understanding the historical calendar tendencies of your market can help affirm a winning setup, as well as help you avoid losers.

The worse it looks, the better it works. And vice versa (most of the time). Don’t let pre-market action overly influence your decision to fade a gap or not.

The news is noise. Don’t worry about the financial or economic news that caused the gap. It will only add unnecessary confusion and second-guessing.

Low hanging fruit is the sweetest. Entering at the market open catches all the easy winners. Waiting to enter after the open misses the easiest winners and catches all of the losers.

Like money sitting on a table Many gap setups are prone to continuing through the prior close after filling. Know the personality of your gap setup and when to hold through the gap fill for an extended target, or when to close before the gap fills.

Size matters. Trade the position size that does not overly stress you, financially or emotionally, even if you have three or four losers in a row.

Watch out for the BLUDs. Fading gaps Below the Low of a (prior) Up Day is only profitable about 50% of the time historically.

The three amigos. Don’t forget about the other two gap plays: “Forget the Fade” (i. e. go-with) and “Fade the Fill.” They can add winning setups to your trading tool box.

Focus on the horizon. Let the long term probabilities work to your advantage and don’t try to guess which trade will work or not. Have a plan, follow your rules, and accept that losers are the cost of doing business.