Ten Patterns

Every Gap Trader

Should Know
February 16, 2010
New York Traders Expo

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!!

Copyright 2010, Master The Gap, Inc.
 Agenda
• Gap Basics
• How I Trade Gaps
• Risky Patterns
• Supportive Patterns
• For More Info...

Copyright 2010, Master The Gap, Inc.

 What is a Gap?

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.”

Copyright 2010, Master The Gap, Inc.

What Does a Gap Look Like?

Copyright 2010, Master The Gap, Inc.

Example of Gap: Daily Chart

Close of prior day

$48.38
• Next day gap down
• Opens at $47.61
• Fills the gap exactly

Copyright 2010, Master The Gap, Inc.

 Example of Gap: 5 Min Chart

Next day
opening price Price retraces
(9:30 am ET) & fills gap

Prior day
closing price
(4:00 pm ET)

Copyright 2010, Master The Gap, Inc.

 Fact: Over 70% of all
opening gaps have filled
the same day.

(but the losses from 30% that

didn't fill, equaled the profits from
the winners)

Copyright 2010, Master The Gap, Inc.

 The key to making money
fading opening gaps is…

SELECTION

(i.e avoiding most of the losers)

Copyright 2010, Master The Gap, Inc.

 How I Trade Gaps

1) Focus on
SELECTION
2) Enter at the open
3) Hold for gap fill or beyond
(rarely scale out prior to fill)
4) Use a LARGE enough stop
enough to let probabilities work
(~30% of 5 day ATR)

Copyright 2010, Master The Gap, Inc.

How I Select Gaps To Trade

Copyright 2010, Master The Gap, Inc.

 My Opening Gap Trades
(Sep, 2007 to Feb, 2010)
• Actual TradeStation-generated report for
small, trading account (~$50k starting)

• Only opening gap trades

• Trade plan specifics (i.e. long/short, target,

and stop) were posted online for each of
these trades for members prior to opening
bell and prior to trade entry

• Trades were entered at 9:30 am EST

• There is no assurance that my performance

will continue

• Your results will vary, perhaps substantially,

depending on many factors

(Note: “trade number” includes scaling out, actual # of gap

trades = ~200 total)
Copyright 2010, Master The Gap, Inc.
 Definitions
u Fade: to trade in the opposite direction of the gap

u Gap Fill: when price retraces from the open to the

prior day's close (regular session)

u Win %: percent of opening gaps that, if faded at the open,

fill the gap or end the day profitable

u Winner: I successively faded this gap

u Good Call: I passed on this gap setup

u ES: E-mini S&P futures

u QQQQ: Nasdaq 100 ETF

Copyright 2010, Master The Gap, Inc.

Risky Patterns

Copyright 2010, Master The Gap, Inc.

Gaps Following “False Down Days”
Direction is down
but close is “Up”
ABOVE
close of Gaps
2 days ago

Higher close

“Up”
“Up”gaps
gapsfollowing
followingfalse
false'down'
'down'days
dayswill
will
confuse
confuseand
andtrap
trapsome
sometraders
traders
Copyright 2010, Master The Gap, Inc.
Gaps Following “False Down Days”

Win % ES QQQQ

Up
64% 66%
Gaps
Direction is down
Down but close is
71% 88% ABOVE
Gaps close of
2 days ago
Source: ES: 1999 – 2008; QQQQ: 2003 - 2008

“Up”
“Up”gaps
gapsfollowing
followingfalse
false'down'
'down'days
dayswill
will
confuse
confuseand
andtrap
trapsome
sometraders
traders
Copyright 2010, Master The Gap, Inc.
Gaps Following “False Down Days”

March 25, 2009: Good Call

Copyright 2010, Master The Gap, Inc.

Gaps Following “False Up Days”

Lower close

Direction is “up”
but close is “Down”
BELOW
close of Gaps
2 days ago

“Down”
“Down”gaps
gapsfollowing
followingfalse
false‘up’
‘up’days
dayswill
will
confuse
confuseand
andtrap
trapsome
sometraders
traders
Copyright 2010, Master The Gap, Inc.
Gaps Following “False Up Days”

Win % ES QQQQ Direction is “up”

but close is
BELOW
Up close of
79% 65% 2 days ago
Gaps

Down
65% 64%
Gaps

Source: ES: 1999 – 2008; QQQQ: 2003 - 2008

“Down”
“Down”gaps
gapsfollowing
followingfalse
false‘up’
‘up’days
dayswill
will
confuse
confuseand
andtrap
trapsome
sometraders
traders
Copyright 2010, Master The Gap, Inc.
Ex: Gap following false “up” day

April 7, 2009: Good Call

Copyright 2010, Master The Gap, Inc.

Gaps Opening Below S1 Pivot

S-1
“Down” Opening
Gaps below
Daily S-1

Down
Downgaps
gapsbeyond
beyondS-1
S-1often
oftenindicates
indicatesaachange
changeof
ofmarket
market
sentiment
sentiment&&will
willrun
runstops
stopsplaced
placedjust
justbeyond
beyondthis
thiskey
keylevel
level
Copyright 2010, Master The Gap, Inc.
Gaps Opening Below S1 Pivot

Win % ES QQQQ

Up
n/a n/a
Gaps S-1

Down Opening
55% 60% below
Gaps
Daily S-1
Source: ES: 1999 – 2008; QQQQ: 2003 - 2008

Down
Downgaps
gapsbeyond
beyondS-1
S-1often
oftenindicates
indicatesaachange
changeof
ofmarket
market
sentiment
sentiment&&will
willrun
runstops
stopsplaced
placedjust
justbeyond
beyondthis
thiskey
keylevel
level
Copyright 2010, Master The Gap, Inc.
Gaps Opening Below S1

May 21, 2009: Good Call

Copyright 2010, Master The Gap, Inc.

Gaps Opening Above R1 Pivot

“Up”
Opening
Gaps above
Daily R-1
R-1

Up
Upgaps
gapsbeyond
beyondR-1R-1often
oftenindicates
indicatesaachange
changeof
ofmarket
market
sentiment
sentiment&&will
willrun
runstops
stopsplaced
placedjust
justbeyond
beyondthis
thiskey
keylevel
level
Copyright 2010, Master The Gap, Inc.
Gaps Opening Above R1 Pivot

Win % ES QQQQ Opening

above
Daily R-1
Up R-1
62% 59%
Gaps

Down
n/a n/a
Gaps

Source: ES: 1999 – 2008; QQQQ: 2003 - 2008

Gap
Gapbeyond
beyondR-1R-1often
oftenindicates
indicatesaachange
changeof
ofmarket
market
sentiment
sentiment&&will
willrun
runstops
stopsplaced
placedjust
justbeyond
beyondthis
thiskey
keylevel
level
Copyright 2010, Master The Gap, Inc.
Ex: Fade of gap opening above R1

April 24, 2009: Stopped Out

Copyright 2010, Master The Gap, Inc.

 Gaps Opening Below
Low of Prior Up Day (“BLUD”)

“Down” Below Low

Gaps of Up Day

Longs
Longswill
willbe
becaught
caughtoff
offguard
guardand
andcover
covertheir
their
positions
positionswhile
whilenew
newshort
shortsellers
sellersjump
jumpin
intoo
too
Copyright 2010, Master The Gap, Inc.
Gaps Opening Below Low of Prior
Up Day (“BLUD”)

Win % ES QQQQ

Up
n/a n/a
Gaps

Down Below Low

53% 55% of Up Day
Gaps

Source: ES: 1999 – 2008; QQQQ: 2003 - 2008

Longs
Longswill
willbe
becaught
caughtoff
offguard
guardand
andcover
covertheir
their
positions
positionswhile
whilenew
newshort
shortsellers
sellersjump
jumpin
intoo
too
Copyright 2010, Master The Gap, Inc.
Ex: Gap opening in “BLUD”
zone

April 20, 2009: Good Call

Copyright 2010, Master The Gap, Inc.

Supportive Patterns

Copyright 2010, Master The Gap, Inc.

Gaps Following 3 Higher Lows
Fade “Up”
Gaps

Three
Higher
Lows

After
After33successively
successivelyhigher
higherlows
lowsand
andaagap
gaphigher,
higher,
profit
profittaking
takingis
ismore
morelikely
likely
Copyright 2010, Master The Gap, Inc.
Gaps Following 3 Higher Lows

Win % ES QQQQ

Up
85% 83%
Gaps
Higher
Down Lows
72% 74%
Gaps

Source: ES: 1999 – 2008; QQQQ: 2003 - 2008

After
After33successively
successivelyhigher
higherlows
lowsand
andaagap
gaphigher,
higher,
profit
profittaking
takingis
ismore
morelikely
likely
Copyright 2010, Master The Gap, Inc.
 Ex: Fade of gap
following 3 higher lows

May 7, 2009: Winner

Copyright 2010, Master The Gap, Inc.

 Gaps Opening Higher
Than High of 2 Days Ago

Fade “Down”
Gaps

AAgap
gapdown
downthatthatopens
opensabove
abovethe
thehigh
highofof22days
daysprior
prior
is
islikely
likelyto
toattract
attractmore
morebuyers
buyersofofweakness
weakness
Copyright 2010, Master The Gap, Inc.
 Gaps Opening Higher
Than High of 2 Days Ago
Win % ES QQQQ

Up
75% 77%
Gaps
Above high
Down of 2 days
80% 83% ago
Gaps

Source: ES: 1999 – 2008; QQQQ: 2003 - 2008

AAgap
gapdown
downthatthatopens
opensabove
abovethe
thehigh
highofof22days
daysprior
prior
is
islikely
likelyto
toattract
attractmore
morebuyers
buyersofofweakness
weakness
Copyright 2010, Master The Gap, Inc.
Ex: Fade of gap “down”
opening above
high of
2 days ago

April 3, 2009: Winner

Copyright 2010, Master The Gap, Inc.

 Gaps Opening Lower
Than Low of 2 Days Ago

Low
of 2 days
ago
Fade “Up”
Gaps

AAgap
gapupupthat
thatopens
opensbelow
belowthe
thelow
lowof
of22days
daysprior
prior
is
islikely
likelyto
toattract
attractmore
moresellers
sellers(“dead
(“deadcat
catbounce”)
bounce”)
Copyright 2010, Master The Gap, Inc.
 Gaps Opening Lower
Than Low of 2 Days Ago
Win % ES QQQQ
Below low
of 2 days
Up ago
80% 79%
Gaps

Down
69% 77%
Gaps
Source: ES: 1999 – 2008; QQQQ: 2003 - 2008

AAgap
gapupupthat
thatopens
opensbelow
belowthe
thelow
lowof
of22days
daysprior
prior
is
islikely
likelyto
toattract
attractmore
moresellers
sellers(“dead
(“deadcat
catbounce”)
bounce”)
Copyright 2010, Master The Gap, Inc.
Ex: Fade of gap “up” opening lower
than low of 2 days ago

February 24, 2009: Winner

Copyright 2010, Master The Gap, Inc.

Gaps Following Large Unfilled “Up” Gaps
(> 20% of 5 day ATR)

Fade Up
& Down
Gaps

> 20% of
5 day ATR

Gaps
Gapsfollowing
followingaalarge
largegap
gapthat
thatfailed
failedto
tofill
fillare
are
good
goodfades
fadesbecause
becausethe
themarket
marketwill
willoften
oftenconsolidate
consolidate
Copyright 2010, Master The Gap, Inc.
Gaps Following Large Unfilled “Up” Gaps
(> 20% of 5 day ATR)

Win % ES QQQQ

Up
86% 82%
Gaps
> 20% of
Down 5 day ATR
84% 80%
Gaps

Source: ES: 1999 – 2008; QQQQ: 2003 - 2008

Gaps
Gapsfollowing
followingaalarge
largegap
gapthat
thatfailed
failedto
tofill
fillare
are
good
goodfades
fadesbecause
becausethe
themarket
marketwill
willoften
oftenconsolidate
consolidate
Copyright 2010, Master The Gap, Inc.
Ex: Fade of gap following
large unfilled “up” gap

March 24, 2009: Winner

Copyright 2010, Master The Gap, Inc.

Gaps Following Large Unfilled “Down” Gaps
(> 20% of 5 day ATR)

> 20% of
5 day ATR

Fade Up
& Down
Gaps

Gaps
Gapsfollowing
followingaalarge
largegap
gapthat
thatfailed
failedto
tofill
fillare
are
good
goodfades
fadesbecause
becausethe
themarket
marketwill
willoften
oftenconsolidate
consolidate
Copyright 2010, Master The Gap, Inc.
Gaps Following Large Unfilled “Down” Gaps
(> 20% of 5 day ATR)

Win % ES QQQQ

Up
80% 73% > 20% of
Gaps
5 day ATR
Down
82% 89%
Gaps

Source: ES: 1999 – 2008; QQQQ: 2003 - 2008

Gaps
Gapsfollowing
followingaalarge
largegap
gapthat
thatfailed
failedto
tofill
fillare
are
good
goodfades
fadesbecause
becausethe
themarket
marketwill
willoften
oftenconsolidate
consolidate
Copyright 2010, Master The Gap, Inc.
Ex: Fade of gap following large
unfilled 'down' gap

May 14, 2009: Winner

Copyright 2010, Master The Gap, Inc.

 Risky Patterns
Up Gaps
û Following false 'down' days
û Opening above the daily R1 pivot
Down Gaps
û Following false 'up' days
û Opening below the daily S1 pivot
û Opening Below the Low of an Up Day

Copyright 2010, Master The Gap, Inc.

 Supportive Patterns
Up Gaps
ü Following 3 higher lows
ü Opening below low of 2 days ago
ü Following large, unfilled 'up' gaps

Down Gaps
ü Opening above high of 2 days ago
ü Following large, unfilled 'up' gaps
ü Following large, unfilled 'down' gaps
Copyright 2010, Master The Gap, Inc.
Next Steps

Copyright 2010, Master The Gap, Inc.

 For More Info

ü Check out www.MasterTheGap.com

ü Buy the book: Understanding Gaps

at www.TradersPress.com

Copyright 2010, Master The Gap, Inc.