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Master Emini S&P Gap Trading Techniques

By Lawrence  

master_emini_gaps

There are all sorts of myths and wrong understandings about the Emini S&P gaps being spread everywhere in the trading world. Without careful study of the gaps, many traders choose to use simple trading strategies to capture these gaps. This brutal force approach not only wastes the information provided by the gaps, it also often entails poor risk / reward profile. Gaps actually provide very good information about the trading days to be expected. Proper use of the gaps can produce very profitable trading setups.

In this article I am going to explain the correct gap classification method and its application in discretionary and mechanical trading. Due to the need of price distribution computations, the mathematics behind is quite complex. The math part is not necessary for successful application of the concepts in trading. Hence I choose to skip over the mathematics and explain the main concepts with common sense explanations.

The gap classification method works on both stocks and index futures since they are closely related. Once you are proficient in dealing with the gaps happening in Emini S&P, the skill is equally applicable to stocks with decent liquidity.

The mechanical trading models based on each type of gaps will be published separately with the real-time signals implemented within Real-Time Trading Assistant.

For those who have not done so, please read the chapter Understanding Emini S&P Gaps first to learn the basics about gaps.

Topics Covered

  • Gap Up And Gap Down Do Not Have Directional Bias By Themselves
  • Gap Fill Or Not Is Mostly About The Distribution Of Open Positions
  • The Big Gap Decision Map
  • Expectations from 6 Types of Gaps
  • The Illusive Neutral Zone
  • After Hours Effect on Gap Behaviour
  • Discretionary Approach to Gaps
  • Mechanical Approach to Gaps

 

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Part of Definitive Guide to Emini S&P Day Trading Success



Comments
  • melvyn November 1, 2014 at 9:36 am

    Wow after many months of screen time and observation what you postulated above provides a very good framework to better understand how to engage, in the index I trade what u described happens almost like clockwork.. Is there a reason for each of the scenario as to why they are this way? Or behave this way?

    • Lawrence November 6, 2014 at 4:37 am

      Read the intro article. It is all about the market making process being the dominating factor right after open, most of the time.

  • WeeklyOF November 2, 2014 at 12:09 pm

    Thank you for posting the framework for attacking the gap trade. This is the best summary that tackles all the gap types I have seen anywhere.

    The definition zone of “neutral zone” or “price distribution” you have defined is well known by VolumeProfile and Auction Market Theory traders. The POC ( point of control) is the most transacted price between buyers and sellers. It is a single price level – by taking the 23% of that Value Area from the POC, you come close getting the NEUTRAL ZONE. If you are mechanical trader, the values for POC/VAH/VAL is easy to get from the indicator.

    General observation is that the neutral zone tends to act as very good support/resistance zone. I.e. the best gap setups you have listed ( 1.Bullish strong close/ GAP DOWN + staying above neutral zone / 2. Bearish weak close / GAP UP + staying below neutral zone)

    Also neutral zones tend to act as magnets. I.e. The 2nd best setups you listed (1. Bullish strong close + Gap up above PDH +against upper resistance), you will get responsive seller that will take it back to gap/neutral zone 2. Bearish strong close + Gap below PDL +against lower support), responsive buyers will take it back to gap/neutral zone)

    All the ideas you presented here works because that is how an auction works, a very natural part of the AMT( auction market theory). If people are interested in reading more about it, there are lot of good sources out there. This is a good place to start. http://www.cisco-futures.com/Auction_Market_Theory.html

  • WeeklyOF November 2, 2014 at 12:13 pm

    LC, I would classify the GAP & GO to be a highly reliable and directional trade setup. Typically you have the MOO( market on open orders) execute creating a swing high/low ( usually within 5mins of open) and break of that will dominate the move toward a a major target ( i.e. gap/neutral zone, big support /resistance) and even range extension of that move further.

    • Lawrence November 6, 2014 at 4:34 am

      The reason why gap and go is not truly directional is that you need the first reaction after open to see if the higher timeframe support/resistance has accepted the challenge.

      It is common to see almost complete reversal against the gap direction, yet, the gap is not filled and the day ended up with gap and go winning at the end. Gap and go playbook is more complex than the other ones.

  • WeeklyOF November 10, 2014 at 9:19 am

    Thank you. Are u able to publish how often these gaps types occur, ( Occurrence%) and Probability of success %? I like to compare with my backtest results

    • Lawrence Chan November 11, 2014 at 10:10 pm

      the prob. is just one aspect of the gaps.

      how to engage them and what to expect in general is more interesting. =)

  • WeeklyOF November 12, 2014 at 8:20 am

    Is that going to be your next article? =)

    • Lawrence Chan November 12, 2014 at 6:27 pm

      I am preparing several trading models to go with the gap identification in real-time.

      You can use them mechanically if you like. You can also use the roadmap I provide to see how to deal with them. The goal is to enable you to see the possibilities with proper historical perspective, not just my words. =)

  • Conan March 16, 2017 at 9:47 pm

    Thanks for all the great insights! I just have one question: What are the precise technical definitions of a “Strong Close” and a “Weak Close”? From the contexts in which the terms are used, I’m guessing “Strong Close” simply means “Prior Day Close was above Prior Day Open,” and “Weak Close” simply means “Prior Day Close was below Prior Day Open.” Is it that simple? Or is there more to it, like maybe a minimum distance required between PDC and PDO, or a max distance allowed between PDH and PDC (Strong Close), or a max distance allowed between PDL and PDC (Weak Close). Thanks for clarifying.

    • Lawrence March 26, 2017 at 12:09 pm

      Strong and weak are not simple conditions.

      Context matters – check out the art of chart reading series to see how trend affects the way we interpret the charts.

  • Conan March 29, 2017 at 12:46 am

    Well, I’ve read the Art of Chart Reading series. Though full of great information, I don’t remember a precise definition for Strong Close or Weak Close being given there. If we want, we can say that chart reading is an art, and therefore the terms cannot be precisely defined. I can accept that, but it doesn’t help me to write a computer program to trade the setups you describe here. The computer needs precise definitions for Strong and Weak Closes.

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