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This is a discussion on my journal within the Trading Journals forums, part of the Reception category; Originally Posted by travis I am learning the value of capital at these times of extreme "poverty". It's good. I ...

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Old Oct 17, 2009, 4:50pm   #286
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Quote:
Originally Posted by travis View Post
I am learning the value of capital at these times of extreme "poverty". It's good. I got myself into this mess. I mean: I did begin with no capital at all, but the fact that I am down to 10k from the 30k I was at, many times these past two years, is entirely my fault, so it's good that I am suffering because of it. It's time that I treat this thing as a serious job, rather than a monopoly game or a risk game. This is serious. The longer I screw around the longer I will have to work at the bank. It's all up to me what happens in the future.

I also have just realized that it's not enough that I just don't touch my systems. It's important that I don't use a reckless money management. I need to weigh as carefully as possible what systems I am letting trade (now that I can't let them all trade). I worked on some formulas that are now going to be final and will only let the most performing systems trade. Diversification is good, but it's best that I pick only the best systems and best trades and best days of the week now that I both have little capital and no rush at all to increase it (since I decided that I will not withdraw anymore from my trading account). No rush. Just trade on the best days, the best systems. I pick the best systems by calculating for each system the ratio of:
Code:
FTP / (drawdown + margin)

FTP: forward tested profit 
drawdown: highest between forward tested drawdown and back tested drawdown
margin: margin required
you should do what a guy out of market wizards does, every time he has a consecutive loss, he cuts his risk/lot size by half, keeps it low during a drawdown. like for example if your system endures a 10% drawdown, cut risk by half, to 20%, cut half again...etc.

+ do the same thing when your systems are on a roll, of course you have to cap your lot size/risk per trade at some point
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Old Oct 17, 2009, 5:03pm   #287
 
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Yamato started this thread It sounds interesting, and I have heard it before, but before even considering it (and maybe that's good because it sounded too complicated and I wouldn't know how to go about testing such a method), I can see immediately a problem. The most I am trading on any future is one contract, and I can't divide that by half.

Another problem, of logic, I see in such a method - but maybe it's my logic that isn't good enough - is that I don't think that negative trades tend to stick together nor drawdown happens all at once. Sometimes it does, but not always, so it's not like I just say "oh, look there's a first of a series of negative trades, let's stop right here and wait until they end".

Also, I did test a method where systems were traded only if equity curve was above a given moving average and it didn't prove profitable. Where this method reduced trades by 20%, it also cut profits by 20%. Where it reduced trades by 50%, it also cut profits by 50%. It didn't seem to give me any edge. I either did it all wrong (possible), or the method doesn't work at all, or I have such good systems (in back-testing) that do not have drawdowns long enough to be avoided effectively. This is not to say that the method I am talking about is the same as the method you suggested. But it is somewhat related, at least vaguely. But then again, I am not good with formulas, so I may be talking nonsense. However, I am always making an effort, no matter what I am doing. I either do it properly, as perfectly as I can, or I don't even start doing it.
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Old Oct 17, 2009, 7:10pm   #288
 
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Yamato started this thread Wow! I've been watching a whole bunch of great comedies on Watch Movies For Free - LetMeWatchThis.com Free Online Movie and TV Downloads - Latest and it seems like almost all people involved in these american comedies are jewish american. I am absolutely amazed, considering how few jewish americans there are (less than 2% of US population). The list goes from legends like The Marx Brothers, Jerry Lewis, Danny Kaye, Woody Allen to Adam Sandler, Ben Stiller, Jack Black, Rob Schneider, Lorne Michaels, Judd Apatow, David Cross, Bill Maher, Billy Crystal, Rodney Dangerfield, David Zucker & Jerry Zucker, Harold Ramis, Kevin Kline, Albert Brooks, Seth Rogen, Jonah Hill...

Also, I noticed that many of these people involved in comedy are Canadians as well. Those who are not Jewish nor Canadians are very few.

I think these are the major ones who are not Jewish Americans: John Belushi, Dan Aykroyd, Bill Murray, Chevy Chase, Steve Martin, Chris Farley, David Spade, Will Ferrell, Owen Wilson, Vince Vaughn, Dana Carvey, Mike Myers (needless to say many of these are Canadians).
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Old Oct 17, 2009, 7:20pm   #289
 
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Yamato started this thread What am I worried about? What was that thought that just crossed my mind? It said "you're watching movies and not working... shame on you". So what? I don't have to do anything anymore. Everything is taken care of. No capital withdrawing. The drawdown will not kill me, since I have taken all precautions: best days, best systems with smallest drawdowns... I don't have to do anything but turn it on in the morning and turn it off at night. If I get any power outages I have my friend who hosts me... nothing to worry about until I reach 50k. Nothing at all. I can watch movies. Yes, I can. I can watch movies. Nothing to worry about. No more systems to create. I can do that in another life. No need to worry about quantity anymore. I just have to relax and not burn out. I'll worry about quality whenever I get a programming bug or money management problem. For the rest, it's all taken care of.
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Old Oct 17, 2009, 7:48pm   #290
 
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Yamato started this thread Now I am going to watch this movie, Extreme:
Watch Extreme Movie movie on LetMeWatchThis.com Free Online Movie and TV Downloads

I don't know anything about it, but the title appeals to me, because it describes how I am with just one word: extreme. Of course I don't see myself as "extreme": the others do. But language was created to communicate with others, so I might as well use a term they understand, and by their definition, in general, I am "extreme". I see myself as "normal" and generally see others as superficial and inexistent.
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Old Oct 17, 2009, 7:59pm   #291
 
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Originally Posted by travis View Post
Now I am going to watch this movie, Extreme:
Watch Extreme Movie movie on LetMeWatchThis.com Free Online Movie and TV Downloads

I don't know anything about it, but the title appeals to me, because it describes how I am with just one word: extreme. Of course I don't see myself as "extreme": the others do. But language was created to communicate with others, so I might as well use a term they understand, and by their definition, in general, I am "extreme". I see myself as "normal" and generally see others as superficial and inexistent.
Msn if you fancy it; discussing some business this time I've finished backtesting.
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Old Oct 17, 2009, 8:21pm   #292
 
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Yamato started this thread Hey, thanks for the offer, but right now I really can't do it. We will work on it next weekend (on backtesting a new system together: it will be my 38th). I am still recovering from losing 5000 this week and I feel pretty depressed. Besides, I just finished building those last 13 systems, and I need a break from backtesting or I will burn out like a cpu without a fan.

That movie, Extreme, was not so good. I will just stop watching it. I am going to watch this instead:
Watch Black Sheep (1996) movie on LetMeWatchThis.com Free Online Movie and TV Downloads

Its title appeals to me just as well, because, besides being told that I am "extreme", I have also been considered the "black sheep" by family and relatives (except since I went to study in the States, but until then I've always been failing classes, and they treated me like the black sheep).
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Old Oct 18, 2009, 7:23am   #293
 
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Yamato started this thread Here I am. I went to sleep early, it's 8 am and I've got a whole day ahead of me, but I have no idea what to do. I've eliminated all friends, because they made me spend money and time, and now I have no money but a lot of time to spend, and really have no idea what to do. I've lost the habit of enjoying myself. Maybe I'll watch another movie, or look into some trading systems. Damn, what a boring life I am leading. And, because of the nature of my trading (automated, and all work already done), it's not likely to change in the near future. I'll just have to sit and do nothing. And also avoid friends because I can't afford to waste any money, and they usually cause me to spend money.
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Old Oct 18, 2009, 7:39am   #294
 
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Yamato started this thread All right, I've taken the decision to work on another 10 trading systems, all based on the same stuff: opening gap (different securities). Let me document how I start when I create a system (not always). I went to google and looked for:
opening gap system - Google Search

Then I picked what looked best to me:
Why the opening gap strategy makes an ideal automated trading system | MoneyHighStreet.com
The Opening Gap Strategy - Why it Makes a Good Automated Trading System
Automated trading Systems - Opening gap strategy equity curve | MoneyHighStreet.com

Probably these articles borrow from one another: so much the better. It means it's a good concept.

I've often wondered why people with a good strategy would write about it on the internet. I have no idea. I always thought that maybe they didn't make any money with it, but just enjoyed teaching people. This could be the case for some of them, but it cannot be the case for all of them. Some must be trading the things they are teaching.

I wouldn't teach all of the things I do - I would teach a few. But it could be the case that for other people it's different and they teach what they do. This in turn means that they are not afraid these things might stop working because they teach them. I don't know if they are right. In principle, if you know that going long at 5 pm is a good idea and tell everyone, more people will do it, this will drive prices up, and it will become less convenient do so. But probably they are counting on the fact that not enough people will follow them, and those who will follow them will be so grateful that they will outweigh the loss of profit.

If instead they miscalculated the effect of spreading their edge on the internet, and if everyone knew what's best to do, nothing would be best anymore, and the markets would be a flat line. I don't believe in the Efficient-market hypothesis. I believe the markets - right now - are not efficient and you can make money consistently by outperforming them. However, this could change and if you keep on spreading tips on what to do to outperform the market, you will contribute to making them more efficient, and your edge will tend to disappear.

I went to wikipedia and found more on this subject:
http://en.wikipedia.org/wiki/Technical_analysis

Quote:
Efficient market hypothesis
The efficient market hypothesis (EMH) contradicts the basic tenets of technical analysis by stating that past prices cannot be used to profitably predict future prices. Thus it holds that technical analysis cannot be effective. Economist Eugene Fama published the seminal paper on the EMH in the Journal of Finance in 1970, and said "In short, the evidence in support of the efficient markets model is extensive, and (somewhat uniquely in economics) contradictory evidence is sparse."[34] EMH advocates say that if prices quickly reflect all relevant information, no method (including technical analysis) can "beat the market." Developments which influence prices occur randomly and are unknowable in advance. The vast majority of academic papers find that technical trading rules, after consideration for trading costs, are not profitable.[citation needed]

Technicians say that EMH ignores the way markets work, in that many investors base their expectations on past earnings or track record, for example. Because future stock prices can be strongly influenced by investor expectations, technicians claim it only follows that past prices influence future prices.[35] They also point to research in the field of behavioral finance, specifically that people are not the rational participants EMH makes them out to be. Technicians have long said that irrational human behavior influences stock prices, and that this behavior leads to predictable outcomes.[36] Author David Aronson says that the theory of behavioral finance blends with the practice of technical analysis:

By considering the impact of emotions, cognitive errors, irrational preferences, and the dynamics of group behavior, behavioral finance offers succinct explanations of excess market volatility as well as the excess returns earned by stale information strategies.... cognitive errors may also explain the existence of market inefficiencies that spawn the systematic price movements that allow objective TA [technical analysis] methods to work.[35]

EMH advocates reply that while individual market participants do not always act rationally (or have complete information), their aggregate decisions balance each other, resulting in a rational outcome (optimists who buy stock and bid the price higher are countered by pessimists who sell their stock, which keeps the price in equilibrium).[37] Likewise, complete information is reflected in the price because all market participants bring their own individual, but incomplete, knowledge together in the market.[37]

[edit] Random walk hypothesis
The random walk hypothesis may be derived from the weak-form efficient markets hypothesis, which is based on the assumption that market participants take full account of any information contained in past price movements (but not necessarily other public information). In his book A Random Walk Down Wall Street, Princeton economist Burton Malkiel said that technical forecasting tools such as pattern analysis must ultimately be self-defeating: "The problem is that once such a regularity is known to market participants, people will act in such a way that prevents it from happening in the future."[38] In a 1999 response to Malkiel, Andrew Lo and Craig McKinlay collected empirical papers that questioned the hypothesis' applicability[39] that suggested a non-random and possibly predictive component to stock price movement, though they were careful to point out that rejecting random walk does not necessarily invalidate EMH.

Technicians say the EMH and random walk theories both ignore the realities of markets, in that participants are not completely rational and that current price moves are not independent of previous moves.[20][40] Critics reply that one can find virtually any chart pattern after the fact, but that this does not prove that such patterns are predictable. Technicians maintain that both theories would also invalidate numerous other trading strategies such as index arbitrage, statistical arbitrage and many other trading systems.[35]
Overall, I would say that the professors are wrong, and the traders are right, and especially that maybe not me, but there are traders living (consistently) from trading, so this alone proves that you can outperform the markets. The explanation as to why professors are so wrong, could be this: the professors teach, the traders trade. If a professor found out that he can make money trading and outperform the markets, then he would trade, and would cease to be a professor or he wouldn't even make it to become a professor. So as a consequence you cannot have professors who say that you can make money with trading.

Another explanation could be that all those who make money by outperforming the markets are interested in hiding their edge, so they'd all be happy if others thought that you cannot develop an edge. So, on one side, you have those who cannot trade and who say "you just can't make money trading" (also to make themselves feel better about not trading profitably themselves), and on the other side, you have others who know this is not true, but are ok if everyone else stays ignorant and therefore will not go out of their way to tell everyone they're wrong, also because they might be asked to demonstrate that, and that would expose their edge. If you tell people you make money in the markets via automated trading, you're telling them a lot. You're telling them it's possible and you're telling them in what direction to do. Maybe that's why, when I lose, I am happy to write it. First of all because I enjoy telling the truth, and second of all because, even by telling the truth, I might discourage people from following me in doing automated trading, which will help preserve some of my edge. I think that if I'll ever get beyond a capital of 100k, I will just stop writing the journal, because I'd feel I have something very precious, and I'd be afraid of having it stolen. On the other hand, right now, I don't feel like I have much, simply by looking at my very small bank account, and at my 12 years of losses. That's also why the best time to ask me about my strategies is right after they cost me a big loss, and the worst time is right after they gave me a big profit.

There's plenty of people like me who enjoy speaking the truth, who are talkative, and who are going to write pages and pages about themselves and how successful they are, showing off, bragging, boasting and so on. So some information will get away and that is partly why, on the internet, there's so much information on how to develop a trading edge. Also, you won't hear all the profitable traders keeping quiet, so it will seem that just about everyone is talking about how they make money: deceptive appearance that will lead you to think that they are just out to sell you something, whereas they're just out to show off like me (looking for someone who'll tell them "wow, you're a genius"). Hopefully the articles I will read on "opening gap" are written by people who know what they are talking about, and not by people who just enjoy teaching, even though they don't know if those things work. The very good thing is that with tradestation, it will take me just a few hours to find out whether the "opening gap" works or not.

Last edited by Yamato; Oct 18, 2009 at 9:44am.
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Old Oct 18, 2009, 9:46am   #295
 
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Yamato started this thread So let's keep on reading this article together, the first one I set my eyes on:
Why the opening gap strategy makes an ideal automated trading system | MoneyHighStreet.com

Quote:
...Trading the opening gap

As we know these parameters we can use this information to enter a trade for these reasons:

We know the direction to trade – i.e. go short to fade a gap up or long to fade a gap down
We know where to enter the trade – if fading a gap up, go short with a limit order just below the opening price
We know where to exit the trade – if fading the gap set our profit target at gap fill, yesterdays closing price.
So we have all this known information about our trade before we enter it, which is good trading practice.

Not many trades can be managed with such precision, which makes the opening gap strategy appealing to day traders.
Right now I am thinking that this guy knows what he's talking about. He's talking with precision, with a good vocabulary and with clarity. He reminds me of how I write, so I trust him. I like the way he writes, I feel he's similar to me, and I feel I can trust him. Also, what he says makes sense to me, even though, believe it or not, I never came up with the "opening gap" strategy myself, and until now didn't know what it was about. By everything he says and by how he says it, I assume this strategy is a profitable one, and I assume he enjoys explaining things out loud. I still don't know why he writes an article on a financial web site read by so many people, which could cause the strategy to become widespread and lose its edge. I ignore that reason, but I still trust him.

So. Everything so far makes sense and seems easy to test and to program except for one thing. I am testing and implementing everything on continously trading futures, so there can be no gaps by definition. I could solve that quite simply: find out when the underlying security opens and closes, and refer those prices. For example: the SP index opens at 9.30 EST and closes at 16.00 EST. I will compute 16.00 as the close and 9.30 as the open on my ES future. This, or a similar method, will solve the problem: however things are not as simple anymore. This small variation could cause overoptimization or other data problems. It could even make the strategy untestable. However, I will worry about this later, once I have understood completely what the strategy is about. I don't like to read, but I have to finish at least this whole article.

Quote:
Auto trading the opening gap strategy

Automated trading systems work on clearly defined rules so being able to tightly describe the trade parameters is of importance when designing an automated system.

As we have shown, the opening gap strategy clearly defines when to trade and when to exit. It also creates good money management opportunities as you can clearly define stop loss and move to break even points.

Opening gap strategies are therefore good candidates for automated trading systems as well as being ideal for discretionary trading.
This all appeals very much to me because it's as if this article was written just for me. That's the tremendous power of search engines: with the right search terms, they delivered to me exactly what I needed. It's not like I put to work this guy for me. This guy wrote whatever he felt like writing. But through the search engine I found exactly what I needed. I found the most valuable product for me, and for free.

Anyway, let's keep reading: "Automated trading systems work on clearly defined rules so being able to tightly describe the trade parameters is of importance when designing an automated system". By this sentence I know I am reading an article written by an automated trader like me. There are no longer any doubts. I still do not see why he's giving away his edge.

"As we have shown, the opening gap strategy clearly defines when to trade and when to exit. It also creates good money management opportunities as you can clearly define stop loss and move to break even points". It's very true. I could very well make these Opening Gap strategies the last of all my strategies and bring my total of systems to a staggering 46.

Ok, so far so good. I don't think there's much more to say (he's not saying much either), but let's keep reading.

Quote:
A winning opening gap trade with oil futures today

You can see these factors in our image at the top of this article (click the picture for a full sized image). This shows a winning trade from our automated gap trading system today.

A down gap was created today so the system went long when certain candle conditions were met. The profit target was gap fill at todays opening price. As you can see from the enlarged image, the gap filled and our profit target was met.

The automated system then exited the trade and shut down having made a nice profit today.
It's very short, simple and complete. I appreciate the fact they kept it as simple as it needed to be, with no extra bull****, as it's usually the case with newspaper articles or school books.

Let's move on to their other article.

Last edited by Yamato; Oct 18, 2009 at 10:27am.
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Old Oct 18, 2009, 10:26am   #296
 
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Yamato started this thread Automated trading systems: the opening gap strategy | MoneyHighStreet.com

Quote:
Trading is about playing the odds and statistical probabilities. The opening gap trading strategy is based on statistical probabilities and therefore lends itself very well to automated trading.

What is the opening gap?

An opening gap is formed when the daily opening price of an instrument (stock or future) is significantly higher, or lower, that the closing price from the previous day.

The difference in price between todays’ open and yesterdays’ close is due to after hours and pre-market trading activity. Events such as news or company results that causes after hours price to move significantly can create a gap.

An opening gap creates a trading opportunity based on sound statistical probabilities.

What is gap fill?

Gap fill occurs when price moves to fill in the empty space in the gap. It is a statistical fact that gaps will always be filled.

For example, if todays opening price is higher than yesterdays closing price, then gap fill will occur when price falls back to yesterdays closing price. The gap is filled and no longer exists.

Although we know that a gap must always be filled, we cannot predict when that will happen. It may be today, or at any time in the future, depending on the dynamics of the market.
"Trading is about playing the odds and statistical probabilities. The opening gap trading strategy is based on statistical probabilities and therefore lends itself very well to automated trading". Once again I like this guy.

"An opening gap is formed when the daily opening price of an instrument (stock or future) is significantly higher, or lower, that the closing price from the previous day". They lost me here, because most futures I know close for about one hour so what gap could there be? Therefore we must be talking about gaps between close and open of the underlying security.

"The difference in price between todays’ open and yesterdays’ close is due to after hours and pre-market trading activity. Events such as news or company results that causes after hours price to move significantly can create a gap". There you go, you confirmed to me that you are not talking about futures, because pre-market and after-hours don't exist on futures. The future is just a future all the time, but wait: this tells me exactly what hours I should use for calculating an artificial close and open. The period is what IB calls "normal trading session", the one where "50% Margin Cut-Off Time" is applied. I have all those hours written down for each future I trade, so that's good.

"Although we know that a gap must always be filled, we cannot predict when that will happen. It may be today, or at any time in the future, depending on the dynamics of the market". This is good, too. Everything is written clearly and logically.

Quote:
Statistical probabilities

Research has shown that the size of the opening gap can play a role in the probability of the gap being closed that trading day.

In general, 70% of opening gaps are filled on the same trading day so they present excellent opportunities for day traders.

This figure represents gaps fills for all sizes of opening gaps, some of which will be too small to trade profitably, so the percentage of gap fills from tradable gap sizes is probably nearer 50%.

Although there is a definite mathematical edge to trading the opening gap, there is no certainty in this strategy at all so it is vital that you protect your position with strategically placed stop losses.
Ok, so this is saying that only 50% of gaps are large enough to be traded profitably? No, this time they are not clear at all. It's saying that 70% of gaps get filled, but not all of them are big enough to be traded. So it is saying that you will trade profitably 50% of all gaps. But it didn't say what the percentage of too-small-to-trade gaps are, so we don't know **** now, because you will not even begin trades on the small gaps. This part here sucks. By not writing down everything they know, they made it all worthless. Of course I'll get these data from my own tests anyway.

"Although there is a definite mathematical edge to trading the opening gap, there is no certainty in this strategy at all so it is vital that you protect your position with strategically placed stop losses". Ok this right here is going to be my biggest problem. In all my systems I don't use any stoplosses, because it works better that way both for profits AND implementation on excel. So I either will find out that it's more convenient to close opening gap trades after a given number of hours, or I will have to come up with a method to exit via stoploss. Which sucks because I've never done it, and it's yet another problem to solve.

Quote:
Pulling it all together

You can see the opening gap strategy in action in the image above (click image to enlarge). The instrument was oil futures (symbol CL), October 2009 contracts using a 5 minute chart.

A large gap up was created which filled soon after market opened.

Fading the opening gap (trading against it) with a short limit order and a profit target of gap fill produced a profitable trade with a higher degree of probability.

In our next article, we will discuss how opening gaps present good opportunities for automated system trading.
This is good. Also I like the fact that I found all this on a big e-zine so it means that it's undebatable, otherwise they would get a bunch of negative replies and would lose their reputation. Of course they didn't say very much this time either. Not because anything is missing, but because as with all strategies, all could be summed up in one sentence: bet on the gap being filled.

I have enough energy to read one more article.

Last edited by Yamato; Oct 18, 2009 at 10:58am.
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Old Oct 18, 2009, 11:04am   #297
 
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Yamato started this thread This article's title makes it sound like either of the authors has copied from the other, or maybe it's the same author, even though the article is not exactly the same:

The Opening Gap Strategy - Why it Makes a Good Automated Trading System

No, wait: it's the same guy, who wrote slightly different articles and didn't sign the ones I quoted above:
Chris Ray - EzineArticles.com Expert Author Bio

So at least now we know who it is, and this page writes exactly what I had commented before on his style of writing:

Quote:
Chris Ray owns and operates MoneyHighStreet.com, a website that offers news and tips about personal finance for consumers in the UK.

Chris has spent several years in the finance industry and feels that many consumers are not as aware of finance and money issues as they could, and should be.

Chris has always enjoyed writing and takes pride in publishing articles that help educate people about personal finance without jargon and complexities.

With a BSc in Physiology, Chris has had a lifelong interest in health and fitness and visits the gym and swims as often as possible.

Spending time with his wife and two children takes up most of his spare time, however Chris occasionally finds time for golf and music, but not at the same time!
Let's read the whole article anyway, to see what differences there are. For one thing it should be written earlier, because the other one was very very recent.

Quote:
The opening gap trading strategy is a high probability trading method than can bring good returns to the active day trader.

This article will show that this method makes an ideal automated day trading system.

Let's start off by briefly explaining what an opening gap is. It is created when after hours trading activity drives the price significantly far from the closing price. When the market opens the next day, there is a large difference between the price at the start of the new session, and the prior days closing price.

This creates a gap and a trading opportunity with a high probability of success as research has shown that gaps are filled around 70% of the time during that trading session.
Ok, this I read before, more or less, but reading the word "ideal" made me decide that I cannot miss a system that is "ideal" for automated trading, so I am officially setting out to do this and build another 9 trading systems (as many as the futures I trade) on the opening gap strategy, bringing my total to 46. It just cannot be possible, by the way this guy talks, that he made up his whole theory. So it must work and I will make it work. And... thank you, Chris ray.

Quote:
Fading the opening gap

To fill a gap down, buyers must enter the market in strength and drive the price upwards so that it travels to, or beyond, the prior closing price. This is called fading the gap and leads to a term called gap fill. The same applies to filling a gap down, although it is sellers who determine this price action.

An ideal day trading strategy

Fading the opening gap makes an ideal day trading strategy. With a high probability that a large gap will be filled during that session, traders can place either long or short trades, depending on the direction of the gap, at the opening price and have a good expectation that price will move favourably for them.

The price action occurs during that session and will either result in the trade being successful or the stops being hit if gap fill is not achieved. The trader should always close his position at the end of the day if neither of these scenarios has been reached.
Hey, that's just perfect. Close the position at the end of the day. I don't like using stoplosses. I am just going to do exactly what he suggests. One problem less.

Quote:
Why this is ideal for automated trading

The opening gap trade has a number of known parameters that make it ideal for automated trading. The trade entry point is known (the opening price) and the trade exit point is also known - the gap fill price. Also it is relatively easy to calculate the stop loss position which comes into play if gap fill is not achieved.

These known parameters can be programmed into an automated trading system that can then place the trades and undertake effective money management all without intervention from the trader.

This means a number of instruments such as futures contracts can be traded at the same time without the need for a trader to be at the computer screen during the trading session.

You can learn more about automated trading systems and see how the opening gap is being traded effectively with a trading robot at http://www.medianetrix.com.
Hmm, is this guy really selling stuff? I don't think so. The world is not plotting against us. However, he's inviting us to visit the web site of a company selling a trading system based on the opening gap strategy. This doesn't mean anything because he didn't provide the link in his other articles. But if he's quoting them, it could mean that he's not trading the strategy with an automated trading system himself. It could mean that he's saying "the way to do it is to buy a product", because he ignores you can automate it yourself. I certainly do not think he's selling anything, but if he's recommending a company's product, it could mean that he has not implemented an automated system himself, and if he didn't, his articles could lose some validity.

Anyway, if a company sells this product, whether it works or not, the product itself (and similar products) will drive the market in a given direction. The popularity of this strategy itself will drive discretionary traders as well in that direction, so there's definitely something happening and therefore there must be a profitable way to trade it, with or against the theory. I could also develop a strategy that goes the other way as soon as the gap is filled.

The next step is testing everything on tradestation. But I won't post it here all the time, because it would take me ten times as much time. The reason I quoted the articles and commented them as I was reading them is that I would have been too bored to read them by myself, even if they were quite short. By writing here, I forced myself to read them, to explain them and to understand them, much better than if I had read them by myself. I don't like to read. I can't read. I only learned how to write. While they were teaching how to read, I skipped classes. Or maybe reading in a way is like being told what to do. And I developed early on a strong sense of rebellion against authority figures like my dad and teachers - my dad, that asshole, was telling me what to do too often - and even now I don't like to be told what to do. Hey, this is interesting. Intermediate swears are blocked. But really vulgar ones are ok.

Last edited by Yamato; Oct 18, 2009 at 11:39am.
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Old Oct 18, 2009, 11:57am   #298
 
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Yamato started this thread This is quite good as well, much more elaborate and complex. If I had read this as the first article, I would have just quit:
StockCharts.com - ChartSchool - Gap Trading Strategies

This is worse than Chris Ray's articles because it sets out to explain much more and it does it very incompletely. So overall it explains much more, but less than what it promised. It leaves you puzzled and confused. So it is ****. But still useful, only because Chris in his articles had already made it all clear to me.

Here's another good article:
TraderFeed: Do Opening Gaps Tend to Fill?

Quote:
The difference between the market's opening price and its previous day's close forms a gap on a bar chart. Does this gap tend to fill in during the next day's price action? That is, when we open with a gap lower or higher, do prices subsequently move back to the prior day's close?

For this investigation, I measured gaps as a function of the previous day's high-low range. This measures the gap relative to the prior day's volatility. Thus, an opening gap of two points that follows a day with a range of six points is measured as a 33% gap. The same opening gap of two points that follows a day with a range of ten points is measured as a 20% gap.

Assessed in this manner, we find that the average opening gap is 27% of the previous day's range going back to May, 2003 (N = 897 trading days) in the S&P 500 Index (SPY). That provides us with a benchmark for defining relatively large and relatively small gaps.

When upside gaps exceed 40% of the prior day's range (N = 99), 46 of them fail to close during the day session. When downside gaps exceed 40% of the previous day's range (N = 81), 40 of them go unfilled. Bottom line: approximately half of all large opening gaps don't fill during that coming day's action.

Conversely, when the upside or downside gaps are less than 40% of the last day's range (N = 717), only 144 of them go unfilled. When the gaps are less than 20% of the last day's range (N = 431), only 51 of these fill in. Stated otherwise, 80-90% of relatively small gaps will fill in during the coming day's action.

Interestingly, when we have a large opening gap to the upside, the *following* day's price change averages .18% (68 up, 31 down). When we have a large opening gap to the downside, the next day's price change averages .09% (48 up, 33 down). But when the opening gap is small, the subsequent day's price change averages only .03% (381 up, 336 down). In sum, large gaps in either direction tend to be bullish for the next day's price change.

When we measure gaps in this fashion, it takes relative changes in volatility out of the equation. The average size of the opening gap, defined as a function of the prior day's range, has been the same in 2006 as previously, despite our dramatic drop in volatility since 2003. Standardizing how we measure gaps provides us with a better sense for when gaps are large--and are less likely to fill--and when they're small--and more likely to fill.

Last edited by Yamato; Oct 18, 2009 at 12:11pm.
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Old Oct 18, 2009, 1:14pm   #299
 
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Yamato started this thread I've decided to start my opening gap strategy tests on the GBL because it makes things simpler, as I don't have to fix anything: it's actually a future I trade and it has far apart closes and opens. The others (ES, EUR, etc.) trade continuously, so I'd have to find a way around that, which may implicate some mistakes. That's one of the reasons I always go for the simplest things: they help avoid mistakes. The more you do, the more you could fail along the way.

The GBL starts trading at 8.00 CET and stops trading at 22.00 CET. I've got some good data on the GBL. The problem is that it started closing at 22.00 CET only at the end of 2005. So I only have a few good years. I can't test the previous years because once again it could be a cause for mistakes and any sort of bias.

To keep things simple, I will start with a LONG-only strategy.

Now, from a summary of everything I read, I need to enter against the gap. First of all, how do I find out in easylanguage if there was a gap?

Today's open is not necessary. I will just poll the price at 8.15. If it's lower than yesterday's close, I will go LONG, like this:

Code:
If marketposition = 0 and time = 0815 and c<closed(1) Then Buy("Long") This Bar;
The question will then be also: did it stop falling? Maybe we should use a moving average to let it fall as much as it wishes, before betting on the closing of the gap. I'll see that later. For now it'd be too much detail.

Now, how do we close the trade? We should close the trade as soon as the gap gets closed. No doubts about this. And it sucks because I am not familiar with automating this. But first let's see if it works. Also, if it doesn't close the gap, we close at the end of the day.

The code will be the following:
Code:
ExitLong("take profit X Long") at closed(1) Limit;
If time >= 1700 Then ExitLong("time X Long") This Bar;
With this simple code, it will now be easy to check if there are any errors, graphically. I need to make sure:
1) when we're lower at 8.15 it means there almost always is a gap
2) take profits at yesterday's close work
3) time exits (in case it didn't close the gap) work

---------

Ok, everything seems fine and it gets 80% of trades right (but almost no gains) but I realized that just being lower than yesterday's close doesn't fully qualify it as a gap. I will add the requirement of the distance being at least 20 ticks (or similar, via optimization). Also I will see what happens, through optimization, if I decrease time required for time exits (e.g.: "if gap doesn't get filled within two hours, then exit").

Code:
Inputs: test(0), test2(0);

If marketposition = 0 and time = 0815 and c<closed(1)-test Then Buy("Long") This Bar; 

ExitLong("take profit X Long") at closed(1) Limit;
If time >= test2 Then ExitLong("time X Long") This Bar;
Still not good enough. A majority of wins, no matter when we exit, around 80%. But the minority of losses makes us gain very little. I will try optimizing everything I can optimize. When the strategy is this simple, there's no danger of overoptimization. Size of gap does not seem to matter.

---

Nothing seems to be working. I need major changes and to do something drastic. I will try make it exit x bars later no matter what gain to see whether there's an edge at all or not. And then we can see if the edge is in doing the opposite:

Code:
Inputs: test(17), test2(0);

If marketposition = 0 and time = test and c<closed(1) Then Buy("Long") This Bar; 

If barssinceentry >= test2 Then ExitLong("time X Long") This Bar;
Ok, still nothing's working. I need more sophistication and precision. I will introduce the famous opening gap condition: opend(0)<closed(1)

Still not working. I know the answer is there somewhere, but I can't find it. I could just abandon the whole thing. No big deal. I am not going to persist at something where I fail, when I easily created dozens of other systems based on other strategies.

There's never been any choice for me. Unfortunately I will have to keep going, build these goddamn 46 systems, and excel at this so much that even my self-destructive tendencies won't keep me from being successful. It's always been this way with me. I am not good at selling myself. I can't bull**** my way out of anything. I either excel at something so my capability is undebatable or I fail. Nobody gave me anything for free, no rewards. That's because I don't like bull****, and therefore I can't sell myself well.

My whole life has pointed in one direction. I see that now. There never has been any choice for me.

Loneliness has followed me my whole life. Everywhere. In bars, cars, sidewalks, stores. Everywhere. There's no escape. I'm God's lonely man.

http://www.scriptcrawler.net/


Last edited by Yamato; Oct 18, 2009 at 2:46pm.
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Old Oct 18, 2009, 2:54pm   #300
 
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Yamato started this thread WOW. Conclusion on my GBL tests: opening gap may be ideal for automated trading but either it doesn't work on the GBL or it's a hell of nightmare to figure out the settings to make it work. I am saying this after two hours trying to make it work on tradestation. And now I am gonna go back to watching my comedy movies.
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