Gap Trading

[options-george]

I am a UK-based trader, and have been trading the Sunday Night gaps on the FX markets since December and it's going ok. Together with someone else, I am now looking to trade opening gaps in the US equity markets. My preference at this point is to trade specific companies rather than the indices.

I have subscribed to briefing.com (trial for the month of June) to get a heads-up as to stocks looking to gap up or down at each day.

For this whole month I will be taking live trades, albeit very small positions, to develop and refine my strategy. With other strategies, I have found this approach to be a faster learning curve then back-testing.

The first thing I have come across relates to how to conduct the trades.
CMC seems to provide a good spread on the CFDs and covers the shares that i am looking to trade. However they charge $2 commission per 100 shares each way. Initial inquiries as to whether these rates are negotiable were answered with a resounding 'no'. Depending on the stop loss size, I will be looking to trade 2,000-10,000 shares per trade.
A half-hour chat with TradeStation was very useful - their commission are significantly lower however they only provide 4-1 leverage on intraday stock positions, whereas CMC does much higher.

I am not keen on the idea to transfer large portions of my trading capital to TradeStation just to take advantage of lower commission rates.

Can anyone comment as to alternate approaches to reducing the transaction cost issue for trading US shares?

 

[Doomberg]

Hey if you were looking at CMC then why not just use their Spread Betting service where you only pay a spread... of even better use IG, i prefer them to any other SB firm as they are the biggest

 

[options-george]

Hey if you were looking at CMC then why not just use their Spread Betting service where you only pay a spread... of even better use IG, i prefer them to any other SB firm as they are the biggest

The spread in using spreadbets is too large - so if you are trading the equivalent of several thousand shares, then this becomes significantly more expensive than trading the "CFD incl. commission"-approach.

I worked out that the implied spread using CFD and commission is around 5-6 cents on a regular stock - i think the spread on a spreadbet is more than that is it not?

Additionally spreadbets are not an option for me since I am trading using a limited company structure - and spreadbetting is only available to natural persons.

 

[options-george]

On Monday (5th June), I took test trades (£5 max loss per trade) on WFC and UTHR since both of them gapped down significantly. My risk:reward ratios were 1.5 or bigger. I took these trades on the IG CFD platform, paying $15 in commission per trade on both entry and exit.

UTHR hit the stop fairly quickly. WFC hit the stop the following the day. What's my time limit for closing the trade if it fails to hit either stop or profit target?

So these two trades cost me about £6 in trading losses and $60 in commissions.

Concluded that my work on this strategy can be divided into two main areas:
1. Developing the technical/chart parameters that I am looking for - defining what constitutes a setup.
2. Determining the most efficient manner for trading my setup - in other words what instrument do I want to use - variables driving this are my ability to leverage, commission costs (if any), spread sizes.

My risk management plan is in place already. For the month of June I am risking 0.05% per trade since I am essentially testing & developing the strategy.

 

[Dogmersfield]

What are the applications of risk management in the Gap trading?
Is it worth practicing the management techniques ?

 

[options-george]

What are the applications of risk management in the Gap trading?
Is it worth practicing the management techniques ?

With risk management I was referring to my intended position sizing. With established strategies I risk a fixed percentage of my trading capital per trade. I will do the same with this gap trading strategy. Though whilst I am testing and developing I will use something minimal such as 0.05% per trade.

If I enter two or more positions simultaneously then I also look at how correlated their likely results tend to be and may end up risking a little less in each position.

The other risk management principles I apply with all my trading are looking for risk-reward ratios greater than 1. With the FX gaps I aim for 1.3-1.5, with this strategy I don't yet know what the appropriate figure is.

 

[options-george]

Still working on the gap trading strategy (thankfully partly together with another trader, so two brains better than one me thinks!).

- Came across www.masterthegap.com and working through all of their ideas. Their methodology is heavily probability based (well historical data is used to derive at the probability figures) - which is right up my alley thanks to my other 'trading' experiences.
- Also signed up with www.briefing.com to get an idea of what (US) companies are going to gap each day and their likely reason for the gap. Tried to apply the principles from the FX gap trading here but was not successful at all. Will continue working there.
- Figured how out to manage the transaction costs - some of the practicalities - this was productive.
- Sunday Night FX gaps still working well - though not easy. Flat for the month of July though a LOT of setups and actual trades compared to the rest of the year thus far. Will also have a look at the gaps in the commodities now too.

Would be very interested to chat with other traders who are using gap strategies. Get in touch if you like.

 

[yiehom]

Still working on the gap trading strategy (thankfully partly together with another trader, so two brains better than one me thinks!).

- Came across www.masterthegap.com and working through all of their ideas. Their methodology is heavily probability based (well historical data is used to derive at the probability figures) - which is right up my alley thanks to my other 'trading' experiences.
- Also signed up with www.briefing.com to get an idea of what (US) companies are going to gap each day and their likely reason for the gap. Tried to apply the principles from the FX gap trading here but was not successful at all. Will continue working there.
- Figured how out to manage the transaction costs - some of the practicalities - this was productive.
- Sunday Night FX gaps still working well - though not easy. Flat for the month of July though a LOT of setups and actual trades compared to the rest of the year thus far. Will also have a look at the gaps in the commodities now too.

Would be very interested to chat with other traders who are using gap strategies. Get in touch if you like.

Why not just stick with FX gaps? they are more reliable than others, me thinks

 

[options-george]

Why not just stick with FX gaps? they are more reliable than others, me thinks

With only the FX gaps, I can't achieve a reasonable monthly return that I would like, in order to 'successfully trade for a living.' One strategy is now working, so I am now working on developing the next one.

G

 

[yiehom]

With only the FX gaps, I can't achieve a reasonable monthly return that I would like, in order to 'successfully trade for a living.' One strategy is now working, so I am now working on developing the next one.G

Okay then, Gorge.
I will probably follow you but for now I try to master the forex gaps first. I took three of them this sunday (U/CHF, E/J, E/CHF) and all 3 were successful. E/CHF is even still on, as I had managed to have all of them with the main trend, so I can even forget about and let the trend do its job.
Problem is there is far less documents on FX gaps than for shares and futures.

Do you know this gap "guru" /www.tradingeveryday.com/Gaps.html

Best

 

[options-george]

Okay then, Gorge.
I will probably follow you but for now I try to master the forex gaps first. I took three of them this sunday (U/CHF, E/J, E/CHF) and all 3 were successful. E/CHF is even still on, as I had managed to have all of them with the main trend, so I can even forget about and let the trend do its job.
Problem is there is far less documents on FX gaps than for shares and futures.

Do you know this gap "guru" /www.tradingeveryday.com/Gaps.html

Best

that's some good Sunday night trading for you. I normally stick to novice gaps, however this time I basically couldn't resist shorting GBPCHF and USDCHF, but only took half risk
on each position because they were professional gaps. Unfortunately my stops were too tight, so I was stopped out on both trades.
What's your process for setting stop and targets for your Sunday nights? I generally only go for gap close or a little beyond, or if its a large gap, I might even aim for only a partial fill.

I have not seen that website before - I will check it out.

 

[ledgy]

I've been trading the Sunday gaps for a while, and have my own rules in relation to whether I take them or not, but to rely on a gap fill as your only strategy is probably not the best, it's just one weapon in the armoury.

 

[options-george]

I've been trading the Sunday gaps for a while, and have my own rules in relation to whether I take them or not, but to rely on a gap fill as your only strategy is probably not the best, it's just one weapon in the armoury.

Hi Ledgy - sounds great. Are you interesting in discussing finer details? Would be great to swap notes with people who trade the same strategy - but of course understand if you guys do not want to exchange finer details.

George

 

[ledgy]

Can't give up the crown jewels that easily George, I could tell you, but I'd have to kill you after!

 

[options-george]

Can't give up the crown jewels that easily George, I could tell you, but I'd have to kill you after!

sure thing :cheesy:

Well do let me know if you ever feel like comparing notes. Btw, did you ever try to apply whatever methodology you are using for Sunday nights, to other markets?

Your comment is also making me think though. Maybe I can do a lot more with the Sunday nights, then I have been doing thus far.

 

[ledgy]

sure thing :cheesy:

Well do let me know if you ever feel like comparing notes. Btw, did you ever try to apply whatever methodology you are using for Sunday nights, to other markets?

Your comment is also making me think though. Maybe I can do a lot more with the Sunday nights, then I have been doing thus far.

All i would say is watch how they move, from the opening of the gap to the close, record it, study any patterns that may emerge.

Go back to past gaps, look at how they react.

I've tended not to trade other markets, gap close on stocks doesn't seem to be as reliable. All the infomation is in the charts history-have a look to see how long stock gaps take to close, from what i've seen some stock gaps take an age to close.

 

[yiehom]

that's some good Sunday night trading for you. I normally stick to novice gaps, however this time I basically couldn't resist shorting GBPCHF and USDCHF, but only took half risk
on each position because they were professional gaps. Unfortunately my stops were too tight, so I was stopped out on both trades.
What's your process for setting stop and targets for your Sunday nights? I generally only go for gap close or a little beyond, or if its a large gap, I might even aim for only a partial fill.

I have not seen that website before - I will check it out.

I did not set any stop loss at all at the beginning, and I never have a target , as as I try to trade with the trend and don't know how far it can go. Just tried to carefully choose the pairs and share my stake into 3 so that at least one will survive. Actually I just got out of the Eur/Chf a couple of minutes ago, and yesterday was an even better day than monday.

 

[yiehom]

I've been trading the Sunday gaps for a while, and have my own rules in relation to whether I take them or not, but to rely on a gap fill as your only strategy is probably not the best, it's just one weapon in the armoury.

If you keep refining your rules and don't overtrade, trading just sundays gaps can even become THE weapon, IMHO

 

[options-george]

If you keep refining your rules and don't overtrade, trading just sundays gaps can even become THE weapon, IMHO

I agree that Sunday night gaps seem to have a lot of potential as a trading strategy. I started trading them last December and seem to be doing ok. They just seem to suit my style of trading and my personality quite well.

Do you guys trade gaps on commodities too, or only FX?

Ledgy, thanks for your comments re stock gaps.

 

[yiehom]

I agree that Sunday night gaps seem to have a lot of potential as a trading strategy. I started trading them last December and seem to be doing ok. They just seem to suit my style of trading and my personality quite well.

Do you guys trade gaps on commodities too, or only FX?

Ledgy, thanks for your comments re stock gaps.

It took me more than a year to try and do some thing around fx gaps and I am not done yet. I try to trade commodities with the COT when I can derive a good conclusion from reading it well, but not yet the gaps. I welcome any info on that also.
Next gap to explore for me is gold, as I read on a forum that it gaps relatively to euro.