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
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
InvestiQuant.com/InspirationDownload a Copy of these Slides
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
ComplimentaryeBook Now!Download Your
“Scott Andrews, The Gap Guy, is one of the world’s foremost experts on gaps and how
they may be traded profitably.”— Ed Dobson, SC
InvestiQuant.com/Inspiration
Scan me and download
...or download your eBook from
a $29.95 value
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
We make learning, fun.
● 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
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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.
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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.
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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.
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
The Basics of Gap Trading
GAPBASICS
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Scott Andrews Trading Tip
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%
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
Stop and Target Placement
STOPSAND
TARGETS
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Scott Andrews Trading Tip
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Scott Andrews Trading Tip
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
Gap Trade Selection
GAPTRADE
SELECTION
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Scott Andrews Trading Tip
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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.
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
For optimal results, your Gap Selection Process should consider an historical analysis of Similar Market Conditions.
GAPTRADE
SELECTION
Trading TipScott Andrews
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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.
Trading TipScott Andrews
GAPTRADE
SELECTION
Figure 10. Market Condition Criteria
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
Example: Multiple Market Conditions Met
4 out of 5 Market Conditions Agreed This Morning GAPTRADE
SELECTION
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
My Selection Process (“Secret Sauce”)
Robust analysis of the historical performance
of similar gaps duringsimilar market conditions.
This is called, Ensemble Forecasting.
GAPTRADE
SELECTION
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
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
Copyright © 2016 InvestiQuant, Inc. All rights reserved. Trade Smarter. Everyday.TM
✔ Download my popular eBook for free, Understanding GAPS
✔ Download a copy of these research slides
✔ 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