Gap Trading History of the Major Candlestick Patternsmtg-downloads.s3.amazonaws.com/GapHistory-CandlestickPatterns.pdf · Title: Using Gap Zones to Create a Profitable Strategy for

Copyright 2012, Master The Gap, Inc.

Special Webinar for TraderPlanet

Scott Andrews

Gap Trading History

of the

Major Candlestick Patterns

Copyright 2012, Master The Gap, Inc. Copyright 2011, Master The Gap, Inc.

Disclaimer

This material is intended for educational purposes only and is believed to be accurate, but its accuracy is not guaranteed. Trading and investing have 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.

CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN

ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT 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 PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

Use this information at your own risk.


Agenda

Gap Basics

Gap Trading History of the Major Patterns

How I Trade Gaps

For More Info...


The most common definition is the

difference between a security’s opening price and its prior day

closing price.

This difference shows up visually on a price chart as an open space or “gap.”

What Is a Gap?


What Does a Gap Look Like?


Examples of Gaps: Daily Chart

Unfilled

Gaps

Gap up filled

Gap down

filled


Close of Nov 11

• Nov 12 gaps down • Opens at $47.61 • Fills the gap exactly

$48.38

Example of Gap: Daily Chart


Example of Opening Gap (5 Min Chart)

Next day opening price (9:30 am ET)

Prior day closing price (4:00 pm ET)

Price retraces & fills gap


Example of “Fading the Gap”

Go long at open (note: if gap were ‘up’ you would short)

Price finally fills gap

Target prior day closing price


SPY Testing Parameters

Timeframe: • Historical data: 10 years (~ 2,500 trading days)

• Dates: 2002 - 2011

• Session time: 9:30am ET to 4:00pm ET

Trade Criteria: • Gap size: 10 cent minimum

• Entry: Market order at 9:31am ET (fade the open)

• Target: Gap fill (previous day’s close)

• Exit: at end of day (4:00 pm ET) if gap did not fill

• Commissions and slippage per trade: none



Fade: to trade in the opposite direction of the opening gap. i.e. short ‘up’ gaps and buy ‘down’ gaps

Gap Fill: when price retraces from the open (9:30 am ET) to the prior day's closing price (4:00 pm ET) Win Rate (%): percent of trades that hit their target without first being stopped, or finish the day profitable

Profit Factor =

hypothetical gross profits from winning trades

------------------------------------------------------------- hypothetical gross losses from losing trades

Key Terms

If the Profit Factor (PF) is > 1

the setup has made money historically


SPY “End of Day” Gap Fill Probabilities

About 70% of opening

gaps will retrace back

to the prior close

the same day they occur


How to use this data

Improve your position entries

Improve your exits

Intraday trading

Can be used with SPY, ES, or related stocks and indices


Candlestick Pattern

Gap Fill Stats


The Doji - Uptrend

Up gaps 40/57 (70%) / 1.9 PF

Down gaps 46/66 (70%) / .8 PF

Shorting ‘up’ gaps after a doji during

an uptrend has been very profitable


The Doji – Downtrend

‘Down’ gaps after a doji during

a downtrend have been more profitable, but less likely

Up gaps 31/48 wins (65%) / .9 PF

Down gaps 17/25 wins (68%) / 1.3 PF


Bullish Engulfing

Gaps in both directions after a bullish engulfing pattern

have shown a bearish bias

Up gaps

4/5 wins (80%) / 2.5 PF

Down gaps 3/7 wins (43%) / .3 PF


Bearish Engulfing

> 90% of gaps following a bearish

engulfing pattern have been to the upside

Up gaps 14/20 wins (70%) / 1.0 PF

Down gaps 2/2 wins (100%)


Hammer

After a hammer, ‘up’ gaps have been riskier for fading

Up gaps 17/26 wins (65%) / .6 PF



Hanging Man

Fading gaps in either direction following a hanging man

has been unprofitable

Up gaps 19/32 wins (59%) / .8 PF



Piercing Pattern

Down gaps following a piercing pattern

have been more likely and more profitable

Up gaps 2/4 wins (50%) / .5 PF



Dark Cloud

‘Up’ gaps after a dark cloud have been more likely

Up gaps 7/9 wins (78%) / 1.1 PF



Bullish Harami

‘Down’ gaps after a bullish harami


Up gaps 17/25 wins (68%) / .7 PF



Bearish Harami

‘Up’ gaps after a bearish harami


Up gaps 23/27 wins (85%) / 1.9 PF



Morning Star

Fading ‘up’ gaps after a morning star

has been very profitable

Up gaps 5/6 wins (83%) / 7.2 PF



Evening Star

Fading ‘up’ gaps after an evening star

have been very profitable too

Up gaps 8/9 wins (89%) / 2.2 PF

Down gaps 2/2 wins (100%)


Bullish Kicker

‘Up’ gaps after a bullish kicker have been riskier

Up gaps 6/11 wins (55%) / .9 PF



Bearish Kicker

‘Up’ gaps after a bearish kicker have been

much more likely and more profitable

Up gaps 19/26 wins (73%) / 2.0 PF



Shooting Star

‘Up’ gaps have been less likely,

but more profitable after a shooting star

Up gaps 6/7 wins (86%) / 1.6 PF



Inverted Hammer

‘Up’ gaps after an inverted hammer


Up gaps 13/19 wins (68%) / 1.6 PF



Trading the gap can be extremely lucrative if you have

a clear and proven edge…


Actual Equity Curve vs S&P 500 (2007 to 2010)

Probability-based gap trading works in bull and bear markets


How I Select Gaps To Trade


www.masterthegap.com/traderplanet

To download a copy of the slides and receive free information about

gap trading:

Gap Trading History of the Major Candlestick Patternsmtg-downloads.s3.amazonaws.com/GapHistory-CandlestickPatterns.pdf · Title: Using Gap Zones to Create a Profitable Strategy for

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