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The Cowboy Gap Fade

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The Cowboy Gap Fade Powered By Docstoc
					“The Cowboy”
  Gap Fade

   SFO Webinar
   May 18, 2010


  Scott Andrews
Disclaimer
This material is intended for educational purposes only and is believed to be accurate, but its
accuracy is not guaranteed. Trading and investing has large potential rewards and large potential
risks. You must be aware of, and fully understand, these risks and be willing to accept them in
order to invest in equity, futures, options, currencies and other financial markets. Do not trade with
money that you cannot afford to lose. This material is neither a solicitation nor an offer to buy or
sell equities, futures, options, or currencies. No representation is being made that any account will
or is likely to achieve profits or losses similar to those discussed. The past performance of any
trading system or methodology is not necessarily indicative of future results.



Use this information at your own risk!!
Agenda
   • The Basics

   • How I Trade Gaps

   • Gap Zones

   • The Cowboy Gap Fade Setup

   • For More Info ...
What is a Gap?

       The most common definition is the
               difference between
      a security's opening price and its prior
           session/day closing price.


   This difference shows up visually on a price
        chart as an open space or “gap.”
Example of Gap: 5-min. Chart


                      Price retraces
                      & fills gap
 Next day
 opening price
 (9:30 a.m. ET)

 Prior day
 closing price
 (4:15 p.m. ET)
The Easiest Trade of the Day
1. Gaps have an inherent bias and edge (>70% win rate).
2. Can prepare in minutes before opening bell.
3. Can trade them without charts from anywhere.
4.   Minimal slippage due to opening volume.
5.   “Fire & forget” – place the order and walk away.
6.   Entry & target are pre-defined – no need to manage.
7.   Risks are limited and controlled – no overnight risk.
8.   They work in bull and bear markets equally well – no need to predict the
     market’s next move.

        Indices (S&P, Dow, Russell, Nasdaq) are ideal gap
     trading markets due to liquidity, reversion bias & ease.
How I Trade Gaps

1.   Focus on SELECTION (Avoid the clouds!)

2.   Enter at the open

3.   Hold for gap fill or beyond (rarely scale out prior
     to fill)

4.   Use a LARGE enough stop to let probabilities
     work (Fly close, but not too close to the trees!)
How I Select Gaps To Trade
“Gap Zones”
                                                           High
  Definition:                                              Close
  Location of the opening price
  gap relative to the prior day’s
  key price levels:
  Open, High, Low & Close

                                                           Open

                                                           Low
   “Location, location, location” … applies to gaps too!
Fill Rates By Gap Zone
  Win %    Prior Day                   Prior Day                            Win %

  60%                                                                        68%

  62%                                                                        81%


  77%                                                                        75%



  77%                                                                        67%

  66%                                                                        55%
              Note: Fading opening gaps > 1 point in the E-mini S&P 500 futures,
              1998-2009, targeting prior close, exiting end of day if gap did not fill.
The Cowboy Gap Fade Setup
• Following a “down” day that closes below the low of 2
  days prior
• Next day gaps up and opens BELOW the low of 2 days
  prior
• Enter short: at open or wait for reversal signal (often
  near the low of 2 days prior)
• Target: gap fill area or beyond (i.e. near prior day lows)


       The low of 2 days ago often serves as resistance
            and sellers will often appear in this area
   The Cowboy Gap Fade Setup
             Prior Day   Win %




Low of 2                 73% (gaps opens above)
days prior

                         79% (gap opens below) “The Cowboy”
Cowboy Gap Fade Stats (S&P 500)
• About 15-25 times per year (250 in past 12 years)
• 79% fill rate (using end of day stop) & profit factor: 1.35
       Target gap fill:

       • Using stop = 20% of 5 day ATR:   60% & 1.5 PF

       • Using stop = 30% of 5 day ATR:   69% & 1.5 PF

       • Using stop = 40% of 5 day ATR:   75% & 1.5 PF




                 Stop size is more of a personal
             preference than profitability determinant
Example of The Cowboy Gap Fade
Example of The Cowboy Gap Fade
Example of The Cowboy Gap Fade
Example of The Cowboy Gap Fade
Trading Tips
• If the market is just starting to sell off, then holding
  some of your position for a test of the prior day’s lows or
  beyond (or until end of the day) is often very profitable
• If the market has been selling off for several days or the
  prior day is a wide range day (>1.5*5 day ATR), then
  targeting gap fill area works best
• The setup works best Wednesday – Friday



         Be sure to study this strategy with the equity
      or instrument you are trading before risking capital
Summary
• The Cowboy Gap Fade is a high probability technique
• You may need to ride it like a “bucking bronco” due to
  the volatile nature of the opening price action for this
  setup
• Stop size will have a big impact on your win rate
• Targeting beyond gap fill can significantly improve your
  total profits


                      Ride ’em Cowboy!
For More Info
 Email: sfoslides@masterthegap.com to:
  • Receive these slides and option to download prior SFO slides
  • Option to sign up for “Daily Gap Wrap” email
  • Learn about my other upcoming webinars


 Buy the book: Understanding Gaps
  (Available at: www.traderspress.com)

				
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posted:8/13/2011
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