Trade Opening Gaps with Historical Odds and Candlesticks

Transcription

1 Trade Opening Gaps with Historical Odds and Candlesticks Thursday, March 3, :00 PM Eastern Time Scott Andrews, Moderator CEO and Co-Founder

2 Risk Disclosure Statement Information contained in InvestiQuant webinars is provided for educational purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy securities. While information contained herein is believed to be accurate at the time of publication, we make no representation as to the accuracy or completeness of any data, statistics, studies, or opinions expressed and it should not be relied upon as such. InvestiQuant, Inc, its employees, owners, and/or affiliates may have positions or other interests in securities (including derivatives) directly or indirectly which are the subject of information shown on InvestiQuant. Neither InvestiQuant, nor any officer or employee of InvestiQuant, accepts any liability whatsoever for any direct or consequential loss arising from any use of this presentation or its contents. Trading futures, options on futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. It should not be assumed that the methods, techniques, or indicators presented here will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. There is a high degree of risk in trading. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually 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 profits or losses similar to those shown.

3 Download a Copy of these Slides InvestiQuant.com/Bigalow

4 Download Your Complimentary ebook Now! a $29.95 value Scott Andrews, The Gap Guy, is one of the world s foremost experts on gaps and how they may be traded profitably. Ed Dobson, SC Scan me and download...or download your ebook from InvestiQuant.com/Bigalow

5 Today s Presentation Agenda Trading Opening Gaps with Historical Odds and Candlesticks Show the only thing that matters on my resume Help you understand the basics of Fading the Gap Explain the logic I use to select and trade gaps Share helpful candlestick research Answer your questions Give you an opportunity to learn more CAMERA ONE STANDBY We make learning, fun.

6 Why Should You Listen to Me? Scott Andrews CEO and Co-Founder InvestiQuant, Inc. Full-time Trader for Over 12 Years Educated Thousands of Traders Since 2008 Took a Company Public in 1999 (SQI) B.S. from West Point, MBA from UNC Former Army Officer & Helicopter Pilot Own a Nice House with a Spacious Kitchen Vacation in Expensive Places My Mom Thinks I m Handsome

7 Why Should You Listen to Me? Scott Andrews CEO and Co-Founder InvestiQuant, Inc. Full-time Trader for Over 10 Years Educated Thousands of Traders Since 2008 Took a Company Public in 1999 (SQI) B.S. from West Point, MBA from UNC Former Army Officer & Helicopter Pilot Own a Nice House with a Spacious Kitchen Vacation in Expensive Places My Mom Thinks I m Handsome

8 Equity ($) Equity Curve September 1, 2007 through February 17, 2016 Trade Number The Only Thing that Matters in Scott Andrews Résumé Scott Andrews Equity Curve for ALL TradeStation trades (2,000+ trades) since he started educating traders, September 1, 2007 through February 17, Figure 1. Scott Andrews Equity Curve from 2007 through

9 The Basics of Gap Trading GAP BASICS

10 Scott, What is a Gap? A gap is the difference between a security's opening price and its prior day s (session) closing price. The difference is shown visually on a price chart as a vertical space or a gap. GAP BASICS

11 Opening Gap Example Prior day s Closing Price at 4:15 PM ET Next day s Opening Price at 9:30 AM ET Figure 2. Opening Gap Example, 5-Min Chart GAP BASICS

12 Strategy: Fade the Opening Gap Fade the 9:30 AM ET Opening Price (Short if gap up, Buy if gap down) Target prior day close (4:00 PM ET or 4:15 PM ET) Close at the end of day, if neither stop nor target is hit during the regular session OPENING GAP FADES

13 Strategy: Fade the Opening Gap Trade in the OPPOSITE direction of the opening gap which means: If the gap is UP, then SHORT. If the gap is DOWN, then BUY. Figure 3. Strategy: Fade the Opening Gap, 5-Min Chart OPENING GAP FADES

14 Why Opening Gap Fades Work Economic and geopolitical events cause Futures markets to gap overnight 90% of all Opening Gaps are large enough to trade 65% to 70% of all Opening Gaps in equity markets tend to fill the same day Gap Fades take advantage of emotional, news-driven traders Gap Fades trade in the same direction as big money traders who rarely pay retail market prices at the open Scott Andrews Trading Tip Opening Gap Fades take advantage of the Mean Reverting Bias of most large, highly liquid markets such as Indices, Large Cap Stocks and other highly liquid markets. OPENING GAP FADES

15 Year Tradable Gaps Win Rate % % % % % % % % % % Average % Opening Gap Fades with Win Rates Scott Andrews Trading Tip 7 out of 10 Opening Gaps fill the same day, making Opening Gaps one of the few setups with an Inherent Bias. Figure 4. Opening Gap Fades with Win Rates OPENING GAP FADES

16 Stop and Target Placement STOPS AND TARGETS

17 Scott, What is the Optimal Target? 78% fill at least 50% of the gap 68% fill all the way Therefore, 85% that fill halfway will reach the Prior Close by the end of the day and fill the gap. Scott Andrews Trading Tip 85% of gaps that retrace halfway will retrace the gap completely. Which means that you should rarely exit your gap fade at 50% fill. Figure 5. Optimal Target STOPS AND TARGETS

18 What is the Optimal Stop Size? By Points By % of Gap Size By % of 5 Day ATR Figure 6. Optimal Stop Sizes by Points, by % of Gap Size and by % of 5 Day ATR (Average True Range) Scott Andrews Trading Tip Stop placement is overrated because it impacts the Win Rate, but does not impact overall profitability. STOPS AND TARGETS

19 Stops and Target Summary STOPS Bigger stops generally increase the Win Rate Tighter stops generally decrease the Win Rate 30% of the 5-day Average True Range (ATR) is good for most markets TARGETS Prior session close is optimal in most situations Extended targets (beyond prior close) are often hit depending on market conditions Scott Andrews Trading Tip There is no right or wrong choice. It is a matter of the desired Win Rate. Trade SELECTION is your key to maximizing profits. STOPS AND TARGETS

20 Gap Trade Selection GAP TRADE SELECTION

21 Gap Size is a Good Selection Criteria Scott Andrews Trading Tip Win Rate and profitability are historically highest for opening gaps if they are < 40% of the 5 Day ATR in size. Figure 7. Gap Size as a Percent of 5 Day ATR (Average True Range) GAP TRADE SELECTION

22 Gap Zone is a Good Selection Criteria If Prior Day was Up Zone Win % U-H 61% U-HC 80% U-CO 76% U-OL 69% Zone Codes are abbreviations for where a market opens the next day: U - Prior day was Up H - High HC - Between High and Close CO - Between Close and Open OL - Between Open and Low L - Low Note: Win % is based on hypothetically fading ~ 2,200 opening gaps 1 pt in the E-Mini S&P 500 futures, , targeting prior close, exiting end of day if gap did not fill. This is not a recommended strategy. U-L 58% Figure 8.1 Gap Zone Selection Criteria Examples GAP TRADE SELECTION

23 Gap Zone is a Good Selection Criteria If Prior Day was Down Zone Win % D-H 49% D-HO 65% D-OC 71% D-CL 78% Zone Codes are abbreviations for where a market opens the next day: D - Prior day was Down H - High HO - Between High and Open OC - Between Open and Close CL - Between Close and Low L - Low Note: Win % is based on hypothetically fading ~ 2,200 opening gaps 1 pt in the E-Mini S&P 500 futures, , targeting prior close, exiting end of day if gap did not fill. This is not a recommended strategy. D-L 65% Figure 8.2 Gap Zone Selection Criteria Examples GAP TRADE SELECTION

24 Part of a Week is a Good Trade Selection Criteria Number of Gaps Total Win Long Win Short Win Monday % 67% 63% Tuesday % 71% 62% Wednesday % 74% 67% Thursday % 72% 64% Friday % 69% 72% Figure 9. Part of a Week is a Good Trade Selection Criteria GAP TRADE SELECTION

25 Candlestick Patterns Can Assist Your Trade Selection, Too CANDLES WITH HISTORY

26 Candlestick Patterns 12 Doji - Uptrend / Downtrend Bullish Engulfing / Bearish Engulfing Hammer / Hanging Man Bullish Harami / Bearish Harami Bullish Kicker / Bearish Kicker Shooting Star / Inverted Hammer CANDLES WITH HISTORY

27 Candlestick Pattern Gap Fill Stats CANDLES WITH HISTORY

28 Testing Assumptions SPY (S&P 500 ETF) January 1, December 31, 2015 (15 years) Fade all opening gaps (short up gaps and buy down gaps) Minimum gap size: $0.10 Entry: market order at the open (9:30 am ET) Exit: at prior day closing price (4:00 pm ET) Commissions are not included Profit Factor (PF) is defined as Profits divided by Losses CANDLES WITH HISTORY

29 The Doji When > 10 DMA Up Gaps 55/84 Wins (65%) / 1.3 PF Down Gaps 71/98 Wins (72%) / 0.9 PF Historical odds favor longs more than shorts, but bigger moves have been to the short-side. CANDLES WITH HISTORY

30 The Doji When < 10 DMA Up Gaps 45/70 Wins (64%) / 1.0 PF Down Gaps 27/38 Wins (71%) / 1.9 PF Long opportunities (down gaps) following dojis have been attractive historically for gap faders. CANDLES WITH HISTORY

31 Bullish Engulfing > 10 DMA Up Gaps 24/33 Wins (75%) / 1.6 PF Down Gaps 24/34 Wins (71%) / 1.2 PF Opening gaps following Bullish Engulfing patterns offer attractive probabilities - regardless of gap direction. CANDLES WITH HISTORY

32 Bearish Engulfing < 10 DMA Up Gaps 32/44 Wins (73%) / 1.0 PF Down Gaps 29/44 Wins (66%) / 1.4 PF Fading down gaps after Bearish Engulfing patterns has been the more attractive trade historically. CANDLES WITH HISTORY

33 Hammer < 10 DMA Up Gaps 24/36 Wins (67%) / 0.8 PF Down Gaps 20/29 Wins (69%) / 1.4 PF The Profit Factors suggest the bigger moves have been to the long side historically - regardless of gap direction. CANDLES WITH HISTORY

34 Hanging Man > 10 DMA Up Gaps 33/51 Wins (65%) / 0.9 PF Down Gaps 44/55 Wins (80%) / 1.2 PF Fading down gaps following Hanging Man patterns has been the more attractive trade historically. CANDLES WITH HISTORY

35 Bullish Harami < 10 DMA Up Gaps 19/31 Wins (61%) / 0.6 PF Down Gaps 36/47 Wins (77%) / 2.3 PF Bullish Haramis have clearly favored the long side. CANDLES WITH HISTORY

36 Bearish Harami > 10 DMA Up Gaps 31/40 Wins (78%) / 1.4 PF Down Gaps 21/36 Wins (58%) / 0.7 PF Bearish Haramis have clearly favored the short side. CANDLES WITH HISTORY

37 Bullish Kicker <10 DMA Up Gaps 10/21 Wins (48%) / 0.9 PF Down Gaps 12/19 Wins (63%) / 1.1 PF Shorting up gaps has been riskier than average when following a Bullish Kicker pattern. CANDLES WITH HISTORY

38 Bearish Kicker > 10 DMA Up Gaps 26/37 Wins (70%) / 1.8 PF Down Gaps 12/15 Wins (80%) / 1.7 PF Bearish Kicker patterns have clearly favored gap faders the following session. CANDLES WITH HISTORY

39 Shooting Star > 10 DMA Up Gaps 10/14 Wins (71%) / 1.1 PF Down Gaps 16/24 Wins (67%) / 0.8 PF The Shooting Star does appear to have a bit of a short bias the next session. CANDLES WITH HISTORY

40 Inverted Hammer < 10 DMA Up Gaps 18/26 Wins (69%) / 1.4 PF Down Gaps 10/17 Wins (59%) / 0.5 PF Gaps following Inverted Hammers have clearly favored the short side. CANDLES WITH HISTORY

41 Scott Andrews Trading Tip For optimal results, your Gap Selection Process should consider an historical analysis of Similar Market Conditions. GAP TRADE SELECTION

42 Market Condition Criteria System Evaluation Criteria Trend Proximity to recent highs or lows to evaluate the general direction of a market or security over a period of time. Momentum Strength of recent prices measured in terms of strength and persistency of a security s price in a specific direction. Volatility The measure of the prior day(s) to prior periods in terms of range contraction and expansion. Overbought or Oversold Relative position of a security s recent price movement in terms of time and amount. Seasonality Day of week and directional bias heading into that session. Scott Andrews Trading Tip Each Evaluation Criteria at the left includes a range of market conditions (such as, extremely bullish, bearish, etc.) that can be attributed to a specific day and instrument, and used for historical analysis. GAP TRADE SELECTION Figure 10. Market Condition Criteria

43 My Selection Process ( Secret Sauce ) Robust analysis of the historical performance of similar gaps during similar market conditions. This is called, Ensemble Forecasting. GAP TRADE SELECTION

44 About InvestiQuant Predictive analytics company serving Intraday, Overnight and Swing Traders Member owned (20 clients are investors in IQ) Hundreds of members with Active Subscriptions for more than 2 years IQ s Team has 60 years of full time trading and research experience Collaboration with Duke University s Center for Quantitative Modeling Regardless of your experience level, our mission is to help you achieve your financial goals by harnessing the power of big data and predictive analytics. You can do it. We can help.

45 3 Reasons to go to Right Now Trad ing a nd Profi ting Next Th Marc ursday, h1 4:30 P 0th at M ET Download my popular ebook for free, Understanding GAPS Download a copy of these awesome slides Auto-register for my webinar on Thursday, March 10 at 4:30 PM ET Trading and Profiting with IQ s Intraday Edges Can t wait? Got Questions? me: Scott@InvestiQuant.com

46 Pattern Definitions Doji - Uptrend: > 10 DMA, (absolute value of prior day open - prior day close) 10% of prior day range Doji - Downtrend: < 10 DMA, (absolute value of prior day open - prior day close) 10% of prior day's range Bullish Engulfing: >10 DMA, body of green daily candlestick that engulfs body of prior red candle, with open < close of the red candle, and close > open of red candle Bearish Engulfing: < 10 DMA, body of red daily candlestick that engulfs body of prior green candle, with open > close of the green candle, and close < open of green candle

47 Pattern Definitions Continued Hammer: < 10 DMA, open and close of prior day in top 33% of it s high-low range for the day Hanging Man: > 10 DMA, open and close of prior day in top 33% of it s highlow range for the day Bullish Harami: < 10 DMA, prior green candlestick that opened and closed inside the body of a prior red candlestick. (i.e. open of green candle > close of prior red candle and close of green candle < open of prior red candle) Bearish Harami: > 10 DMA, prior red candlestick that opened and closed inside the body of a prior green candlestick. (i.e., open of red candle < close of prior green candle and close of red candle > open of prior green candle)

48 Pattern Definitions Continued Bullish Kicker: < 10 DMA, green candlestick opens > top 25% of range of the prior red candlestick and closes > high of the prior red candlestick Bearish Kicker: > 10 DMA, red candlestick opens < bottom 25% of range of the prior green candlestick and closes < low of the prior green candlestick Shooting Star: > 10 DMA, open and close of the prior day in the bottom 33% of it s high-low range for the day Inverted Hammer: < 10 DMA, open and close of the prior day in the bottom 33% of it s high-low range for the day

49 Thank You for Attending We thank you for taking time to learn more about how InvestiQuant s products and services can help you Trade Smarter and achieve your financial goals. Contact Us Share the Love InvestiQuant, Inc. 124 Quade Drive Cary, North Carolina USA Support@InvestiQuant.com