with Historical Odds Trade Opening Gaps and … Patterns Doji - Uptrend / Downtrend Bullish...

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

Trade Opening Gapswith Historical Odds

and CandlesticksThursday, March 3, 2016 8:00 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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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 ● Share helpful candlestick research ● Answer your questions● Give you an opportunity to learn more

Trading Opening Gaps with Historical Odds and CandlesticksToday’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 10 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 February 17, 2016.

Equity Curve September 1, 2007 through February 17, 2016

Trade Number

Equ

ity ($

)

Figure 1. Scott Andrews’ Equity Curve from 2007 through 02.17.16


The Basics of Gap Trading

GAPBASICS


A gap is the difference between a security's opening price and its prior day’s (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 tend to 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.


Part of a 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. Part of a Week is a Good Trade Selection Criteria

is a Good Trade Selection Criteria

GAPTRADE

SELECTION


Candlestick PatternsCan Assist Your

Trade Selection, Too

CANDLESWITH

HISTORY


Candlestick Patterns

● Doji - Uptrend / Downtrend● Bullish Engulfing / Bearish Engulfing● Hammer / Hanging Man● Bullish Harami / Bearish Harami● Bullish Kicker / Bearish Kicker● Shooting Star / Inverted Hammer

12

CANDLESWITH

HISTORY


Candlestick Pattern

Gap Fill Stats

CANDLESWITH

HISTORY


Testing Assumptions

● SPY (S&P 500 ETF)● January 1, 2001 - December 31, 2015 (15 years)● Fade all opening gaps (short ‘up’ gaps and buy ‘down’ gaps)● Minimum gap size: $0.10 ● Entry: market order at the open (9:30 am ET)● Exit: at prior day closing price (4:00 pm ET)● Commissions are not included● Profit Factor (PF) is defined as Profits divided by Losses

CANDLESWITH

HISTORY

●


The Doji When > 10 DMA

Up Gaps55/84 Wins (65%) / 1.3 PF

Down Gaps71/98 Wins (72%) / 0.9 PF

CANDLESWITH

HISTORY

Historical odds favor longs more than shorts, but bigger moves have been to the short-side.


The Doji When < 10 DMA

Up Gaps45/70 Wins (64%) / 1.0 PF


CANDLESWITH

HISTORY

Long opportunities (down gaps) following dojis have been attractive historically for gap faders.


Bullish Engulfing > 10 DMA

Up Gaps24/33 Wins (75%) / 1.6 PF


CANDLESWITH

HISTORY

Opening gaps following Bullish Engulfing patterns offer attractive probabilities - regardless of gap direction.


Bearish Engulfing < 10 DMA

Up Gaps32/44 Wins (73%) / 1.0 PF


CANDLESWITH

HISTORY

Fading down gaps after Bearish Engulfing patterns has been the more attractive trade historically.


Hammer < 10 DMA

Up Gaps24/36 Wins (67%) / 0.8 PF


CANDLESWITH

HISTORY

The Profit Factors suggest the bigger moves have been to the long side historically - regardless of gap direction.


Hanging Man > 10 DMA

Up Gaps33/51 Wins (65%) / 0.9 PF


CANDLESWITH

HISTORY

Fading down gaps following Hanging Man patterns has been the more attractive trade historically.


Bullish Harami < 10 DMA

Up Gaps19/31 Wins (61%) / 0.6 PF


CANDLESWITH

HISTORY

Bullish Haramis have clearly favored the long side.


Bearish Harami > 10 DMA

Up Gaps31/40 Wins (78%) / 1.4 PF


CANDLESWITH

HISTORY

Bearish Haramis have clearly favored the short side.


Bullish Kicker <10 DMA

Up Gaps10/21 Wins (48%) / 0.9 PF


CANDLESWITH

HISTORY

Shorting up gaps has been riskier than average when following a Bullish Kicker pattern.


Bearish Kicker > 10 DMA

Up Gaps26/37 Wins (70%) / 1.8 PF


CANDLESWITH

HISTORY

Bearish Kicker patterns have clearly favored gap faders the following session.


Shooting Star > 10 DMA

Up Gaps10/14 Wins (71%) / 1.1 PF


CANDLESWITH

HISTORY

The Shooting Star does appear to have a bit of a short bias the next session.


Inverted Hammer < 10 DMA

Up Gaps18/26 Wins (69%) / 1.4 PF


CANDLESWITH

HISTORY

Gaps following Inverted Hammers have clearly favored the short side.


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 strength and 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 market conditions (such as, extremely bullish, bearish, etc.) that can be attributed to a specific day and instrument, and used for historical analysis.


GAPTRADE

SELECTION

Figure 10. Market Condition Criteria


My Selection Process (“Secret Sauce”)

Robust analysis of the historical performance

of similar gaps duringsimilar market conditions.

This is called, Ensemble Forecasting.

GAPTRADE

SELECTION


About InvestiQuant● Predictive analytics company serving Intraday, Overnight and Swing Traders● Member owned (20 clients are investors in IQ)● Hundreds of members with Active Subscriptions for more than 2 years● IQ’s Team has 60 years of full time trading and research experience● Collaboration with Duke University’s Center for Quantitative Modeling

Regardless of your experience level, our mission is to help you achieve your financial goals by harnessing the

power of big data and predictive analytics.You can do it. We can help.


✔ Download my popular eBook for free, Understanding GAPS

✔ Download a copy of these awesome slides

✔ Auto-register for my webinar on Thursday, March 10 at 4:30 PM ET“Trading and Profiting with IQ’s Intraday Edges”

Reasons to go towww.InvestiQuant.com/BigalowRight Now 3Can’t wait? Got Questions? Email me: [email protected]

“Trading andProfiting”Next Thursday, March 10th at 4:30 PM ET

http://www.investiquant.com/bIGALOW

http://www.investiquant.com/bIGALOW


Pattern Definitions

1. Doji - Uptrend: > 10 DMA, (absolute value of prior day open - prior day close) ≤ 10% of prior day range

2. Doji - Downtrend: < 10 DMA, (absolute value of prior day open - prior day close) ≤ 10% of prior day's range

3. Bullish Engulfing: >10 DMA, body of green daily candlestick that engulfs body of prior red candle, with open < close of the red candle, and close > open of red candle

4. Bearish Engulfing: < 10 DMA, body of red daily candlestick that engulfs body of prior green candle, with open > close of the green candle, and close < open of green candle


Pattern Definitions Continued

5. Hammer: < 10 DMA, open and close of prior day in top 33% of it’s high-low range for the day

6. Hanging Man: > 10 DMA, open and close of prior day in top 33% of it’s high-low range for the day

7. Bullish Harami: < 10 DMA, prior green candlestick that opened and closed inside the body of a prior red candlestick. (i.e. open of green candle > close of prior red candle and close of green candle < open of prior red candle)

8. Bearish Harami: > 10 DMA, prior red candlestick that opened and closed inside the body of a prior green candlestick. (i.e., open of red candle < close of prior green candle and close of red candle > open of prior green candle)


Pattern Definitions Continued

9. Bullish Kicker: < 10 DMA, green candlestick opens > top 25% of range of the prior red candlestick and closes > high of the prior red candlestick

10. Bearish Kicker: > 10 DMA, red candlestick opens < bottom 25% of range of the prior green candlestick and closes < low of the prior green candlestick

11. Shooting Star: > 10 DMA, open and close of the prior day in the bottom 33% of it’s high-low range for the day

12. Inverted Hammer: < 10 DMA, open and close of the prior day in the bottom 33% of it’s high-low range for the day


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can help you Trade Smarter and achieve your financial goals.

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