Gap Trading History

of the
Major Candlestick Patterns
Special Webinar for TraderPlanet

Scott Andrews
Copyright 2012, Master The Gap, Inc.

Disclaimer
This material is intended for educational purposes only and is believed to be
accurate, but its accuracy is not guaranteed. Trading and investing have 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.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN
ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES
HAVE NOT 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 PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

Use this information at your own risk.

Copyright 2011, Master The Gap, Inc.

Copyright 2012, Master The Gap, Inc.

Agenda
Gap Basics

Gap Trading History of the Major Patterns

How I Trade Gaps

For More Info...

Copyright 2012, Master The Gap, Inc.

What Is a Gap?
The most common definition is the
difference between
a securitys opening price and its prior day
closing price.

This difference shows up visually on a price

chart as an open space or gap.

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What Does a Gap Look Like?

Copyright 2012, Master The Gap, Inc.

Examples of Gaps: Daily Chart

Unfilled
Gaps
Gap up filled

Gap down
filled

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Example of Gap: Daily Chart

Close of Nov 11

$48.38
Nov 12 gaps down
Opens at $47.61
Fills the gap exactly

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Example of Opening Gap

(5 Min Chart)

Next day
opening price
(9:30 am ET)

Price retraces
& fills gap

Prior day
closing price
(4:00 pm ET)

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Example of Fading the Gap

Price finally
fills gap

Target prior day

closing price

Go long at
open
(note: if gap
were up you
would short)

Copyright 2012, Master The Gap, Inc.

SPY Testing Parameters

Timeframe:

Historical data: 10 years (~ 2,500 trading days)

Dates: 2002 - 2011

Session time: 9:30am ET to 4:00pm ET

Trade Criteria:

Gap size: 10 cent minimum

Entry: Market order at 9:31am ET (fade the open)

Target: Gap fill (previous days close)

Exit: at end of day (4:00 pm ET) if gap did not fill

Commissions and slippage per trade: none

Copyright 2011, Master The Gap, Inc.

Copyright 2012, Master The Gap, Inc.

Key Terms

Fade:

to trade in the opposite direction of the opening gap. i.e.

short up gaps and buy down gaps

Gap Fill:

when price retraces from the open (9:30 am ET)

to the prior day's closing price (4:00 pm ET)

Win Rate (%): percent of trades that hit their target without
first being stopped, or finish the day profitable
Profit Factor =

hypothetical gross profits from winning trades

------------------------------------------------------------hypothetical gross losses from losing trades

If the Profit Factor (PF) is > 1

the setup has made money historically

Copyright 2012, Master The Gap, Inc.

SPY End of Day

Gap Fill Probabilities

About 70% of opening

gaps will retrace back

to the prior close
the same day they occur

Copyright 2012, Master The Gap, Inc.

How to use this data

Improve your position entries
Improve your exits
Intraday trading
Can be used with SPY, ES, or related stocks
and indices

Copyright 2012, Master The Gap, Inc.

Candlestick Pattern
Gap Fill Stats

Copyright 2012, Master The Gap, Inc.

The Doji - Uptrend

Up gaps
40/57 (70%) / 1.9 PF

Down gaps
46/66 (70%) / .8 PF

Shorting up gaps after a doji during

an uptrend has been very profitable

Copyright 2012, Master The Gap, Inc.

The Doji Downtrend

Up gaps
31/48 wins (65%) / .9 PF

Down gaps
17/25 wins (68%) / 1.3 PF
Down gaps after a doji during
a downtrend have been more profitable, but less likely

Copyright 2012, Master The Gap, Inc.

Bullish Engulfing
Up gaps
4/5 wins (80%) / 2.5 PF

Down gaps
3/7 wins (43%) / .3 PF

Gaps in both directions after a bullish engulfing pattern

have shown a bearish bias

Copyright 2012, Master The Gap, Inc.

Bearish Engulfing
Up gaps
14/20 wins (70%) / 1.0 PF

Down gaps
2/2 wins (100%)

> 90% of gaps following a bearish

engulfing pattern have been to the upside

Copyright 2012, Master The Gap, Inc.

Hammer
Up gaps
17/26 wins (65%) / .6 PF

Down gaps
14/19 wins (74%) / 1.0 PF

After a hammer, up gaps have been riskier for fading

Copyright 2012, Master The Gap, Inc.

Hanging Man
Up gaps
19/32 wins (59%) / .8 PF

Down gaps
23/33 wins (70%) / .6 PF

Fading gaps in either direction following a hanging man

has been unprofitable

Copyright 2012, Master The Gap, Inc.

Piercing Pattern
Up gaps
2/4 wins (50%) / .5 PF

Down gaps
9/11 wins (82%) / 2.9 PF

Down gaps following a piercing pattern

have been more likely and more profitable

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Dark Cloud
Up gaps
7/9 wins (78%) / 1.1 PF

Down gaps
2/3 wins (67%) / 3.8 PF

Up gaps after a dark cloud have been more likely

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Bullish Harami
Up gaps
17/25 wins (68%) / .7 PF

Down gaps
26/34 wins (76%) / 2.2 PF

Down gaps after a bullish harami

have been more likely and more profitable

Copyright 2012, Master The Gap, Inc.

Bearish Harami
Up gaps
23/27 wins (85%) / 1.9 PF

Down gaps
13/21 wins (62%) / .6 PF

Up gaps after a bearish harami

have been more likely and more profitable

Copyright 2012, Master The Gap, Inc.

Morning Star
Up gaps
5/6 wins (83%) / 7.2 PF

Down gaps
2/3 wins (67%) / 1.0 PF

Fading up gaps after a morning star

has been very profitable

Copyright 2012, Master The Gap, Inc.

Evening Star
Up gaps
8/9 wins (89%) / 2.2 PF

Down gaps
2/2 wins (100%)

Fading up gaps after an evening star

have been very profitable too

Copyright 2012, Master The Gap, Inc.

Bullish Kicker
Up gaps
6/11 wins (55%) / .9 PF

Down gaps
11/17 wins (65%) / 1.1 PF

Up gaps after a bullish kicker have been riskier

Copyright 2012, Master The Gap, Inc.

Bearish Kicker
Up gaps
19/26 wins (73%) / 2.0 PF

Down gaps
7/8 wins (88%) / 1.1 PF
Up gaps after a bearish kicker have been
much more likely and more profitable

Copyright 2012, Master The Gap, Inc.

Shooting Star
Up gaps
6/7 wins (86%) / 1.6 PF

Down gaps
9/15 wins (60%) / .7 PF

Up gaps have been less likely,

but more profitable after a shooting star

Copyright 2012, Master The Gap, Inc.

Inverted Hammer

Up gaps
13/19 wins (68%) / 1.6 PF

Down gaps
8/12 wins (67%) / .6 PF
Up gaps after an inverted hammer
have been more likely and more profitable

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Trading the gap can be

extremely lucrative if you have
a clear and proven edge

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Actual Equity Curve vs S&P 500

(2007 to 2010)

Probability-based gap trading works in bull and bear markets

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How I Select Gaps To Trade

Copyright 2012, Master The Gap, Inc.

To download a copy of the slides

and receive free information about
gap trading:
www.masterthegap.com/traderplanet

Copyright 2012, Master The Gap, Inc.