Gaps with a How to Trade Opening Quantified Edge trading programs in general are also subject to the ... How to Trade Opening Gaps with a Quantified Edge Today’s Presentation Agenda

Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM

How to Trade Opening Gaps with a

Quantified EdgeThursday, April 14, 2016 1:00 PM Eastern Time

Scott Andrews, ModeratorCEO and Co-Founder


Information contained in InvestiQuant webinars is provided for educational purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy securities. While information contained herein is believed to be accurate at the time of publication, we make no representation as to the accuracy or completeness of any data, statistics, studies, or opinions expressed and it should not be relied upon as such. InvestiQuant, Inc, its employees, owners, and/or affiliates may have positions or other interests in securities (including derivatives) directly or indirectly which are the subject of information shown on InvestiQuant. Neither InvestiQuant, nor any officer or employee of InvestiQuant, accepts any liability whatsoever for any direct or consequential loss arising from any use of this presentation or its contents.

Trading futures, options on futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. It should not be assumed that the methods, techniques, or indicators presented here will be profitable or that they will not result in losses. Past results are not necessarily indicative of future 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.

Risk Disclosure Statement


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● Show the only thing that matters on my resume

● Help you understand the basics of “Fading the Gap”

● Explain the logic I use to select and trade gaps

● Answer your questions

● Give you an opportunity to learn more

How to Trade Opening Gaps with a Quantified EdgeToday’s Presentation Agenda

CAMERAONE

STANDBY


Why Should You Listen to Me?

Scott Andrews

● Full-time Trader for Over 12 Years● Educated Thousands of Traders Since 2008● Took a Company Public in 1999 (SQI)● B.S. from West Point, MBA from UNC● Former Army Officer & Helicopter Pilot● Own a Nice House with a Spacious Kitchen● Vacation in Expensive Places● My Mom Thinks I’m HandsomeCEO and Co-Founder

InvestiQuant, Inc.


Why Should You Listen to Me?

Scott Andrews

● Full-time Trader for Over 12 Years● Educated Thousands of Traders Since 2008● Took a Company Public in 1999 (SQI)● B.S. from West Point, MBA from UNC● Former Army Officer & Helicopter Pilot● Own a Nice House with a Spacious Kitchen● Vacation in Expensive Places● My Mom Thinks I’m HandsomeCEO and Co-Founder

InvestiQuant, Inc.


The Only Thing that

Matters inScott Andrews’

RésuméScott Andrews’ Equity Curve for ALL TradeStation trades (2,000+ trades) since he started educating traders, September 1, 2007 through April 14, 2016.

Figure 1. Scott Andrews’ Equity Curve from 09.01.07 through 04.14.16


My YTD Gap Trading Results

*Past performance may not be indicative of future results. There is no assurance that you will achieve similar results using IQ data.

These are actual live gap trading results using $100,000 of Scott’s capital in his IRA using only InvestiQuant data.

These trades were executed using IQ data and Blueprint rule sets for trading the opening gap. No discretion was utilized whatsoever.


The Basics of Gap Trading

GAPBASICS


A gap is the difference between a security's opening price and its prior day

(session) closing price.

The difference is shown visually on a price chart as a vertical space or a gap.

Scott, What is a Gap?

GAPBASICS


Opening Gap

Next day’s Opening Price at 9:30 AM ET

Prior day’s Closing Price at 4:15 PM ET

Example

Figure 2. Opening Gap Example, 5-Min Chart

GAPBASICS


Strategy: Fade the Opening Gap

(Short if gap up, Buy if gap down)

● Target prior day close (4:00 PM ET or 4:15 PM ET)

● Close at the end of day, if neither stop nor

● Fade the 9:30 AM ET Opening Price

target is hit during the regular session

OPENINGGAP

FADES


Trade in the OPPOSITE direction of the opening

gap which means:

If the gap is UP, then SHORT. If the gap is

DOWN, then BUY.

Fade theOpening Gap

Strategy:

Figure 3. Strategy: Fade the Opening Gap, 5-Min Chart OPENINGGAP

FADES


Why Opening Gap Fades Work

Opening Gap Fades take advantage of the Mean Reverting Bias of most large, highly liquid markets such as Indices, Large Cap Stocks and other highly liquid markets.

● Economic and geopolitical events cause Futures markets to gap overnight● 90% of all Opening Gaps are large enough to trade● 65% to 70% of all Opening Gaps in equity markets fill the same day● Gap Fades take advantage of emotional, news-driven traders● Gap Fades trade in the same direction as “big money traders” who rarely pay retail market prices at the open

Scott Andrews Trading Tip

OPENINGGAP

FADES


Opening Gap Fades with Win Rates

7 out of 10 Opening Gaps fill the same day, making Opening Gaps one of the few setups with an Inherent Bias.

Figure 4. Opening Gap Fades with Win Rates OPENINGGAP

FADES


Year Tradable Gaps Win Rate

2015 237 66.7%

2014 227 67.4%

2013 212 64.2%

2012 227 69.2%

2011 243 66.7%

2010 228 71.0%

2009 236 68.6%

2008 235 68.1%

2007 225 64.9%

2006 200 72.5%

Average 227 68.0%


Stop and Target Placement

STOPSAND

TARGETS


Scott, What is the Optimal Target?

85% of gaps that retrace halfway will retrace the gap completely. Which means that you should rarely exit your gap fade at 50% fill.

78% fill at least 50% of the gap 68% fill all the way

Therefore, 85% that fill halfway will reach the Prior Close by the end of the day and fill the gap.

Figure 5. Optimal Target STOPSAND

TARGETS



What is the Optimal Stop Size? By Points

Stop placement is overrated because it impacts the Win Rate, but does not impact overall profitability.

By % of Gap Size By % of 5 Day ATR

Figure 6. Optimal Stop Sizes by Points, by % of Gap Size and by % of 5 Day ATR (Average True Range)

STOPSAND

TARGETS



STOPS● Bigger stops generally increase the Win Rate● Tighter stops generally decrease the Win Rate● 30% of the 5-day Average True Range (ATR) is good for most markets

TARGETS● Prior session close is optimal in most situations● Extended targets (beyond prior close) are often hit depending on market conditions

Stops and Target Summary

There is no right or wrong choice. It is a matter of the desired Win Rate. Trade SELECTION is your key to maximizing profits.

Trading TipScott Andrews

STOPSAND

TARGETS


Gap Trade Selection

GAPTRADE

SELECTION


Gap Size is a Good Selection Criteria

Win Rate and profitability are historically highest for opening gaps if they are < 40% of the 5 Day ATR in size.

Figure 7. Gap Size as a Percent of 5 Day ATR (Average True Range) GAPTRADE

SELECTION



Gap Zone is a Good Selection Criteria

Figure 8.1 Gap Zone Selection Criteria ExamplesGAP

TRADESELECTION

If Prior Day was Up ZoneU-H

U-HC

U-CO

U-OL

U-L

Win %61%

80%

76%

69%

58%

Note: “Win %” is based on hypothetically fading ~ 2,200 opening gaps ≥ 1 pt in the E-Mini S&P 500 futures, 2006-2015, targeting prior close, exiting end of day if gap did not fill.

This is not a recommended strategy.

Zone Codes are abbreviations for where a market opens the next day:U - Prior day was UpH - HighHC - Between High and CloseCO - Between Close and OpenOL - Between Open and LowL - Low


Gap Zone is a Good Selection Criteria

Figure 8.2 Gap Zone Selection Criteria ExamplesGAP

TRADESELECTION

If Prior Day was Down ZoneD-H

D-HO

D-OC

D-CL

D-L

Win %49%

65%

71%

78%

65%

Zone Codes are abbreviations for where a market opens the next day:D - Prior day was DownH - HighHO - Between High and OpenOC - Between Open and CloseCL - Between Close and LowL - Low

Note: “Win %” is based on hypothetically fading ~ 2,200 opening gaps ≥ 1 pt in the E-Mini S&P 500 futures, 2006-2015, targeting prior close, exiting end of day if gap did not fill.

This is not a recommended strategy.


Day of the Week

Number of Gaps Total Win Long Win Short Win

Monday 452 65% 67% 63%

Tuesday 455 66% 71% 62%

Wednesday 452 70% 74% 67%

Thursday 449 67% 72% 64%

Friday 464 71% 69% 72%

Figure 9. Day of the Week is a Good Trade Selection Criteria

is a Good Trade Selection Criteria

GAPTRADE

SELECTION


For optimal results, your Gap Selection Process should consider an historical analysis of Similar Market Conditions.

GAPTRADE

SELECTION



Market Condition Criteria System Evaluation Criteria

Trend Proximity to recent highs or lows to evaluate the general direction of a market or security over a period of time.

Momentum Strength of recent prices measured in terms of persistency of a security’s price in a specific direction.

Volatility The measure of the prior day(s) to prior periods in terms of range contraction and expansion.

Overbought or Oversold

Relative position of a security’s recent price movement in terms of time and amount.

Seasonality Day of week and directional bias heading into that session.

Each Evaluation Criteria at the left includes a range of conditions (such as, extremely bullish, bearish, etc.) that can be used with gap size and zone to greatly improve selection and results.


GAPTRADE

SELECTION

Figure 10. Market Condition Criteria


Example of Importance of Knowing the Current Market Condition

Following 10 Day High Following 10 Day Low

Win Rate 55.4% 40.5%

Profit Factor 1.3 .60

Good trade? Yes No!

Fading All Large ‘Up’ Gaps Since Jan 1, 2000 (> 40% of the 5 Day ATR in size)

GAPTRADE

SELECTION


Example: Multiple Market Conditions Met

4 out of 5 Market Conditions Agreed This Morning GAPTRADE

SELECTION


My Selection Process (“Secret Sauce”)

Robust analysis of the historical performance

of similar gaps duringsimilar market conditions.

This is called, Ensemble Forecasting.

GAPTRADE

SELECTION


Once you have a trading edge,the next step is execution.

Come to our webinar next week on Wednesday April 20 to learn more about

how I execute trades and how you canexecute the exact same trades I do.

Sign up here:

I Have an Edge, Now What?

www.InvestiQuant.com/Inspiration

http://www.investiquant.com/inspiration



✔ Download my popular eBook for free, Understanding GAPS

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✔ Auto-register for my webinar on Wednesday, April 20 at 4:30 PM ET“Trading and Profiting with IQ’s Intraday Edges”

Reasons to go toInvestiQuant.com/InspirationRight Now! 3Can’t wait? Got Questions? Email me: [email protected]

“Trading andProfiting”Next Wednesday, April 20th at 4:30 PM ET



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Gaps with a How to Trade Opening Quantified Edge trading programs in general are also subject to the ... How to Trade Opening Gaps with a Quantified Edge Today’s Presentation Agenda