Wednesday, May 28, 2008

Qs Gap Fade

A classic easy money gap fade on the Qs this morning. (2 minute chart above)
Qs open 49.28, up .23 from previous close and hit R1.
I always watch 9:35--9:45 as a time pivot, looking for signal reversal and possible weakness.
9:38 the Qs penetrate R1 again, but fail to close above that level.
9:40 - a reversal bar after another failed attempt to get through R1.
9:42 - bar opens below previous close, another sign of weakness and I scramble to get short.
Although I enter the SELL at 49.28, I get filled at 48.26 as order flow jumps.
My first downside target is PP at 48.81, which seems likely with the other indices showing weakness (including the IWM).
10:18 - 10:24 The Qs form a little squat bar (not quite a hairy bottom) just a few cents off the PP. I don't like the looks of the long tail doji at 10:22 and at 10:26 with the bar opening above the previous close I cover at 48.92.
Time in trade: 9:42 - 10:26 = 44 minutes
Trade gain: 49.26 - 48.92 = .34
This was a clean gap trade that turned out well.
Looking back at my lower panel trade indicators I could have taken the RSI2 90 cross at 9:32 at 49.32 for an additional .06 gain, but my trading plan restricts me from jumping the 9:38 time threshold and I've learned to stick to the plan.
Leaving .06 on the table is a small price to pay for the SELL signal confirmation.


LP said...

Did the same on the YM. Nice Trades.

bzbtrader said...

Way to go. Care to share any technical differences between trading the Qs and the YM?

LP said...


My studies on gap fades are very similar to Quantifiable Edges. I actually got the idea from John Carter. He claims to have an 85% success ration on these trades. I don't doubt him but his book was very lacking in detail. So I had to hunt to start believing in the possibility. And I am convinced that you can hit a 70 - 80% success ratio. Carter has a 20 point checklist. I myself have only a few points.

To start of I studied 10 years of minute data in the ES and found all gaps that are between 2 - 10 points fill about 60% of the time. These are raw unoptimized stats. Over 2400 trading days. Almost 1800 of the days fell in the 2 -10 point range. That almost fits the 80/20 rule.

1) Look for over bought/sold levels. RSI 4 or 2 will be great here.
2) Gap Up fades must not be in oversold territory on the 60, daily and weekly. The opposite for gap down fades.
3) Vix should be near contrarian extremes.
4) Gap must be 2 ES or 20 YM point at the very least or it's not really worth it.
5) Gap must not be very large. Preferably under 10 ES or 100 YM. Large gaps lead to more upside, short covering and random results.
6) Stop must be loose, 1.5 times gap size. Or over the highs of the overnight. BTW, overnight charts show areas of S&R pretty nicely.
7) Premarket volume must be light. Since the ES is the choice for institutions, volume should average less than 10K per 5 min vol bar.

Now the great thing about indicies is that they all act very similar to each other. Next time you fade the Qs, also fade the YM, ES, ER2 on paper. You'll have just as much success. If it's a high probability trade, then it should not matter if you buy 1000 Qs for a .25 profit or 2 YM contracts for $250 profit. In fact I bet you that you will have an easier fill and less issues on 2 contracts vs 1000 Qs.

Keep up the good work and thanks for sharing. Sometimes it hard to continue sharing in the thankless blogosphere. Anyway, the feed is on and I hope to read regularly.


bzbtrader said...

WOW! That was more than I ever expected. You've obviously done your homework and have a very thoughtful trading plan. I do trade IWM in conjunction with the Qs sometimes, but will explore the futures also.
Thanks for the nuggets.

Kaizen said...

So, if the gap fade signal is after 9:38 you ignore the signal and skip the gap fade trade? Thanks for your effort with the blog!!

bzbtrader said...

Once we get through the first 15 minutes, all gap fade bets are off for me.
That's different from gap and go continutation patterns that turn into strong trending days.
Nothing worse than fading the gap only to find out that the market is now going to continue in the direction of the gap for a couple hundred points.

Evan said...

In this example, did you not need confirmation from TICK and NYAD? Also, will you only trade a gap with the direction that your indicator basket shows?

bzbtrader said...

A significant pop in the NYAD. .say above R2, and then a quick fade down would have certainly been a nice confirmation, but in this case I was focusing on the critical time frame of 9:38-9:42 to gauge the probability of the gap failure. I've done these trades so many times, I can almost "feel" when the gap is going to fail. The other important element here is the pivots. When you get a gap to a pivot and the price fails to hold above that pivot, I then look to the next pivot down as my next likely target. ALSO, I didn't have the parabolics turned on for the chart..if I had it would have flashed a SELL at 9:42. Watching the TICK at the open doesn't really help IMHO gauge whether a gap will fail or continue. Corey also does a nice job with gaps over at Afraid to Trade.

Evan said...

Thanks much for sharing your expertise. Your help is sincerely appreciated.