# Fading Gap Strategy?



## gvanto (13 March 2008)

I was wondering if anyone has experimented with fading the opening gap strategy  on ASX stocks?

Would like to have a discussion about results, I have been testing this myself a bit now too.

Cheerio!
Gert


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## Nick Radge (14 March 2008)

Yes. Its very effective but you'd be best using stock index futures rather than straight shares. 

Some pointers; 

1. The larger the gap, the better the fade but the lower the trade frequency 
2. The stop should be dynamic and not exceed 30% of the average daily range
3. A substantial decrease in volatility will destroy the pattern. It pays to stand aside when vol. drops too much.
4. Usually a volatility _expansion_ is a better method for individual stocks

Good observation. Keep at it.


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## Broadway (15 March 2008)

Heres some random stuff on gaps from various places.

http://www.cbot.com/cbot/pub/cont_detail/0,3206,1070+14719,00.html

http://www.mypivots.com/articles/articles.aspx?artnum=43

http://stockcharts.com/school/doku.php?id=chart_school:trading_strategies:gap_trading_strategies

http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:gaps_and_gap_analysi

The pros know before an open that a gap play will happen. You can see the volume load up in the first few minutes after the start. There are programs that give you "percentage of gap closure" based on various factors, but Ive only seen them for US indices, as they also get more internal data than asian indices.
I read somewhere that countertrend gaps are more likely to close than with trend gaps, but cant say if it's true or not.
I guess if you see a gap, keep in mind the possibility it might close, then wait for price action or volume to confirm your suspicions, then enter when you can.
Use regular money management etc.


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## julius (15 March 2008)

Nick Radge said:


> Yes. Its very effective but you'd be best using stock index futures rather than straight shares.
> 
> Some pointers;
> 
> ...




Nick,

Freddo pointed out to me on another thread that opening gaps have a 'tipping point' where overnight holders will cover their positions on open...

We've seen this a number of times over the past few weeks where the market has gapped on open the pushed up further before reversing and closing the gap.

What are your thoughts ?


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## gvanto (15 March 2008)

> "Yes. Its very effective but you'd be best using stock index futures rather than straight shares. "




Yes I've actually been using the S&P/ASX200 index  values as a filter with the gaps, though with mixed results.

At the moment only using EOD data for test as well. Thanks for your advice on the stop, I was thinking of using a tight-ish trailing stop too on 5-min data although this seems to take quite a while to load (& run).

Test period from Feb2006 - Mar2008.  Win ratio around 40%.

Can I ask what program you use to backtest systems? 

-G


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## gvanto (15 March 2008)

Thanks Broadway - some good articles!

Has anyone backtested a gap-fading strategy for the ASX market?

I have obtained some results as follows: ave_daily is ave. % daily return, so for 0.9% gap size, all trades generated are grouped by day, their % returns averaged (for each day) and the ave_daily then calc'ed as an average of all trading days. 

gap      win_perc        lose_perc       tot_trades      ave_daily       sharpe
0.500    0.380           0.620           5597            -0.103          -0.074
0.600    0.380           0.620           5406            -0.095          -0.067
0.700    0.381           0.619           5232            -0.082          -0.056
0.800    0.378           0.622           5057            -0.071          -0.047
0.900    0.374           0.626           4917            -0.058          -0.038
1.000    0.373           0.627           4764            -0.039          -0.025
1.100    0.373           0.627           4542            0.001   0.001
1.200    0.371           0.629           4375            0.023   0.014
1.300    0.373           0.627           4217            0.043   0.026
1.400    0.373           0.627           4029            0.101   0.059
1.500    0.373           0.627           3870            0.131   0.073
1.600    0.371           0.629           3715            0.150   0.081
1.700    0.371           0.629           3576            0.180   0.095
1.800    0.370           0.630           3467            0.195   0.101
1.900    0.368           0.632           3337            0.245   0.123
2.000    0.370           0.630           3212            0.270   0.132
2.100    0.365           0.635           3081            0.271   0.126
2.200    0.362           0.638           2964            0.278   0.128
2.300    0.362           0.638           2849            0.292   0.128
2.400    0.366           0.634           2727            0.361   0.156
2.500    0.366           0.634           2630            0.377   0.159
2.600    0.363           0.637           2511            0.379   0.152
2.700    0.363           0.637           2424            0.400   0.156
2.800    0.361           0.639           2313            0.516   0.201
2.900    0.359           0.641           2248            0.528   0.207
3.000    0.359           0.641           2170            0.543   0.210
3.100    0.360           0.640           2096            0.562   0.213
3.200    0.359           0.641           2029            0.569   0.207
3.300    0.358           0.642           1961            0.608   0.215
3.400    0.358           0.642           1895            0.601   0.207
3.500    0.358           0.642           1834            0.600   0.204
3.600    0.355           0.645           1764            0.625   0.210
3.700    0.358           0.642           1713            0.664   0.222
3.800    0.361           0.639           1650            0.706   0.231
3.900    0.356           0.644           1588            0.676   0.221
4.000    0.359           0.641           1536            0.702   0.227
4.100    0.362           0.638           1462            0.720   0.232
4.200    0.365           0.635           1382            0.734   0.235
4.300    0.362           0.638           1336            0.717   0.227
4.400    0.359           0.641           1269            0.730   0.229
4.500    0.358           0.642           1233            0.750   0.234
4.600    0.353           0.647           1180            0.767   0.232
4.700    0.351           0.649           1150            0.778   0.235
4.800    0.350           0.650           1086            0.822   0.241
4.900    0.350           0.650           1061            0.827   0.241
5.000    0.347           0.653           1036            0.796   0.228
5.100    0.351           0.649           993             0.795   0.224
5.200    0.347           0.653           971             0.775   0.216
5.300    0.344           0.656           936             0.726   0.202
5.400    0.343           0.657           926             0.729   0.203
5.500    0.345           0.655           898             0.742   0.202
5.600    0.351           0.649           857             0.770   0.205
5.700    0.349           0.651           836             0.731   0.196
5.800    0.346           0.654           817             0.739   0.197
5.900    0.349           0.651           785             0.770   0.202
6.000    0.349           0.651           773             0.778   0.204
6.100    0.348           0.652           749             0.783   0.204
6.200    0.353           0.647           731             0.797   0.207
6.300    0.351           0.649           700             0.737   0.189
6.400    0.350           0.650           682             0.709   0.182
6.500    0.349           0.651           662             0.738   0.196
6.600    0.352           0.648           647             0.764   0.203
6.700    0.354           0.646           618             0.735   0.197
6.800    0.350           0.650           602             0.722   0.193
6.900    0.355           0.645           588             0.741   0.196
7.000    0.352           0.648           576             0.735   0.194
7.100    0.351           0.649           561             0.754   0.198
7.200    0.350           0.650           529             0.729   0.193
7.300    0.352           0.648           517             0.736   0.195
7.400    0.354           0.646           508             0.748   0.198
7.500    0.357           0.643           498             0.782   0.207
7.600    0.355           0.645           485             0.736   0.197
7.700    0.365           0.635           455             0.733   0.196
7.800    0.362           0.638           448             0.735   0.197
7.900    0.360           0.640           436             0.705   0.189
8.000    0.355           0.645           420             0.683   0.186
8.100    0.358           0.642           411             0.710   0.193
8.200    0.360           0.640           397             0.718   0.191
8.300    0.363           0.637           391             0.739   0.199
8.400    0.364           0.636           360             0.762   0.203
8.500    0.365           0.635           353             0.769   0.199
8.600    0.365           0.635           348             0.769   0.199
8.700    0.365           0.635           337             0.757   0.195
8.800    0.363           0.637           328             0.747   0.193
8.900    0.368           0.632           318             0.723   0.182
9.000    0.369           0.631           314             0.726   0.183
9.100    0.376           0.624           290             0.656   0.169
9.200    0.379           0.621           285             0.658   0.170
9.300    0.378           0.622           283             0.639   0.167
9.400    0.377           0.623           273             0.638   0.173
9.500    0.377           0.623           265             0.642   0.175
9.600    0.378           0.622           262             0.644   0.175
9.700    0.373           0.627           255             0.631   0.171
9.800    0.378           0.622           249             0.642   0.173
9.900    0.382           0.618           246             0.642   0.173
10.000   0.379           0.621           235             0.614   0.170
10.100   0.372           0.628           226             0.580   0.162
10.200   0.376           0.624           221             0.579   0.161
10.300   0.372           0.628           215             0.551   0.154
10.400   0.374           0.626           214             0.551   0.154
10.500   0.368           0.632           204             0.574   0.161
10.600   0.369           0.631           198             0.564   0.159
10.700   0.368           0.632           193             0.528   0.151
10.800   0.363           0.637           182             0.528   0.151
10.900   0.362           0.638           177             0.524   0.150
11.000   0.354           0.646           175             0.514   0.147
11.100   0.356           0.644           174             0.517   0.148
11.200   0.358           0.642           162             0.476   0.138
11.300   0.357           0.643           157             0.454   0.133
11.400   0.355           0.645           155             0.442   0.129
11.500   0.353           0.647           153             0.436   0.128
11.600   0.354           0.646           147             0.451   0.134
11.700   0.352           0.648           145             0.454   0.135
11.800   0.358           0.642           137             0.459   0.139
11.900   0.353           0.647           136             0.454   0.138
12.000   0.353           0.647           133             0.440   0.136
12.100   0.354           0.646           130             0.422   0.132
12.200   0.354           0.646           127             0.405   0.128
12.300   0.352           0.648           125             0.403   0.127
12.400   0.352           0.648           122             0.424   0.135
12.500   0.361           0.639           119             0.423   0.135
12.600   0.354           0.646           113             0.437   0.138
12.700   0.351           0.649           111             0.421   0.134


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## gvanto (17 March 2008)

lol those results dont make much sense do they?!


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## Broadway (18 March 2008)

Sorry gvanto, not to me.
I do remember reading in a past spi thread that 60% of spi gaps close in 2-3 days.
The problem is stops.
Good luck.


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## RichKid (18 March 2008)

charttv (an ASF member) did some research on this (or similar strategy, might have been on SPI gaps)....worth searching for his old posts via the search tool. I might be way off line since my memory isn't perfect and it's been awhile since he posted....he might have some ideas eitherway. 

Nick's probably the best on here when it comes to actually testing these things out so you can do much worse than following his pointers.


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## Nick Radge (18 March 2008)

I traded an open gap system for over 6 years on various indices using futures. I don't do it anymore and I never did it on shares. 

If you're going to use EOD you need use the open price and the anchor the stop to that. You cannot use any other stop method with EOD, unless you're using a stop exceeding the ATR. There was a system touted by Roger Montgomery called AGI which imploded immediately after release because, in my opinion at least, of this issue. It is my opinion that he used an intra day stop with EOD data.

Also remember that an opening gap can be defined differently. In the US they define it as any gap above or below the prior close whereas I define it as any gap above yesterdays high or below yesterdays low.


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## MichaelD (18 March 2008)

Nick Radge said:


> I traded an open gap system for over 6 years on various indices using futures. I don't do it anymore.




Why not?


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## gvanto (19 March 2008)

Nick, I assume that you're no longer trading it (the gap open on indices using futures) because it no longer works?  (makes perfect sense eh  

But thanks for your in-depth answer.

Yes whatever gap strategies articles all seem to warn about the stops. 

Can I ask why using an intra-day stop (for backtesting) while finding entries based on EOD data, is not a good thing to do?

For my stop I have the following conditions:
- Close either when prev. close is hit (gap has filled)
- Close when today's close is hit 
(thus, always only staying in for the one day at max)

I first read about this gapping system in a book which had tested it on the US market.  Has anyone tried backtesting on the US market? I am wondering if its more successful on there because of the higher volatility of the US (compared to ASX)


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## Trembling Hand (19 March 2008)

gvanto said:


> I am wondering if its more successful on there because of the higher volatility of the US (compared to ASX)




What do you base that on?


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## gvanto (19 March 2008)

Trembling Hand said:


> What do you base that on?




Not sure - was thinking perhaps that the more volatile market experiences more gaps?

Ok, I'm gonna test this strategy but with extended stop:

- Hold until at least next morning
- Close when prior day's close is hit

Fingers crossed 

ps: you guys daytrade for a living?


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## Trembling Hand (19 March 2008)

gvanto said:


> Not sure - was thinking perhaps that the more volatile market experiences more gaps?




I'm not sure it is more volatile. We have gone up more and down more by about 50% extra over the last year. Which would suggest ASX is more volatile.

I guess if there is more listed stocks as in the US you are more likely to find suitable candidates each day thou.


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## Nick Radge (19 March 2008)

Gaps decrease as global markets open around the world. Australia and Asia have good gaps because of their immediate reaction to US events. Europe has lower gaps because they see how Asia reacts and also because they were open during the early US trading session.


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## Trembling Hand (20 March 2008)

Very in depth testing of Gap fill trades on the ES(S&P500 Futs) here. Think Edwood posted this one in a thread somewhere. Not sure how old it is.

http://www.mypivots.com/articles/articles.aspx?artnum=43


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## gvanto (9 April 2008)

Thanks guys your help much appreciated!

Working on this gap strategy big time now and will look at using some volatility filtering too.

Luke did you get my message (email) ?

cheers
Gerry


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## Trembling Hand (9 April 2008)

Classic Gap closing today on the SPI. 70 points


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## gvanto (9 April 2008)

Wow nice fill !

Everyone seems to be doing this gap-strategy for indexes - anyone tried it on aussie stocks?

G


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