This Week: Is Gap Trading Profitable?

September 26th, 2018

I’ve always been fascinated by gaps.

It’s one thing to look at an indicator or price action or a specific chart pattern. When we do that, we think we’re looking at something that means something.

This indicator is showing an extreme reading, so I’m guessing that’s special. Or this bar engulfed that bar after a doji on the Autumnal Equinox, so that means gains are imminent.

But basically the chart looks the same. Despite our biases, from 30,000 feet that chart looks the same as it did a few bars ago. Nothing really stands out when something is Oversold.

Gaps are different, though.

First off, they look different. Price was “supposed” to open where the last bar closed out and it definitely did not do that. Clearly, very recently, something dramatic has happened and emotions are running high.

What else would cause that gap in the chart?

There’s no doubt about it: when you trade after gaps, you’re trading an emotionally charged market. That’s pretty exciting.

But, exciting or not, the question is: can we make money trading gaps?

This week we’re going to look at trading gaps on equities. We get more gaps in equities and, in my opinion, gaps mean more in equities.

There’s so much more emotion when it comes to stocks. So many more talking heads and so many more people out there losing their minds.

So that’s why we’ll start with stocks.

Specifically, we’re going to start with the SPY ETF (which, of course, mimics the S&P 500). Let’s see if trading gaps is a worthwhile pastime on this instrument. If so, we’ll maybe put a little twist on it and possibly expand our research out to some individual stocks.

• System: Trading Momentum Gaps on Equities (with the trend)
• Philosophy Behind It: A gap up in price means the market is emotional and has an upward bias; let’s take advantage of that emotion.
• Need Special Indicator? No. Our eyeballs can see gaps on our charts.
• Chart: Daily
• Instrument: SPY
• Long or Short? Long Only
• Entry: 1) The low of the current bar must be higher than the previous day’s low; 2) Enter at the Open of the next bar.
• Hypothetical Profit: $9,127
• Hypothetical Max drawdown: -$5,672
• Profit target: none
• Stop loss: none
• Trade size: 10,000 worth of stock each trade
• Hypothetical account size: $10,000
• Test Period: 1999-2018
• Number of Trades: 60

The Performance Report is here:

It turns out that it is profitable to trade Long after price gaps upward. But is that really the best way to trade gaps? We’ll find out in the emails coming out later this week.

You can join the email list here.

To see the weekly YouTube video that talks about timing the market and gaps, go here.

Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.