I have just completed a study of pivot straddles and there impact on gap fading outcomes. I have only looked at the ES and have used 10 years of 1min data. The assumptions made in this study were as follows:
1. Gaps only greater than 2 ticks were analyzed
2. 10 contracts
3. Exit 100% of Gap
4. Stop Loss 20 ticks (5pts)
5. Position closed at end of day if Gap unfilled
6. Commission $2.40 per contract
Case 1- all Gaps using the above assumptions and
Case 2- the 6 assumptions above but excluding gaps with pivot straddle.
What is a pivot straddle you may ask? Simply it is when the daily pivot is between the previous days close and the current days open. I will now post the results and then explain the results.
Case 1 Results
Case 2 Results
The results are that pivot straddles are a risk to gap fading as we saw today were we tested the Pivot twice but failed to transverse it. My study highlights this over a 10 year period that Pivot straddles reduce gap fading profitability by 12 cents for every $1.00 risked. We can see this by the Profit Factor for All Gaps is 1.15 and when we exclude Gaps where there is a Pivot Straddle we see the Profit Factor increase to 1.27 (ie a factor of 0.12). Furthermore, the percentage of profitable trades increases by 5% when we exclude the Gaps with pivot straddles as we would expect it to. It is also worthy to note that both Gaps up and down preformed similar in the study there was no real bias to long or short trades.
Conclusion, give consideration to pivot straddles when gap fading as they do impact the likelihood of a gap filling on the day.
Hope this helps.
Good trading and may all your trades have fat tails and flat distributions.
Here is a legitimate question that was asked of me do the Dax and ESTX50 index futures gap fill like the US index futures do? So I decided to conduct a study on it and here are the result of that study, it was based off 10 years of 15min data. This study was also based off the extended DTB session that is 8am to 10:10pm European Time.
So the numbers are in and the conclusion is, yes they do gap fill like the US does. In fact they have better numbers than the ES, NQ, YM and TF. Both the DAX and ESTX50 highlight was that Friday’s historically is the best day to gap fade the DAX and ESTX50. Approximately 60% of gaps will fill in the first 2 hours of the session for both indexes.
Good trading and may all your trades have fat tails and flat distributions
Here is some insight for all those gappers out there. Yes today is Fed day here are the numbers based off 10 years of Fed Day Gaps only gaps of scheduled meetings have been used in this study and I have just posted the results from the ES futures.
Assumptions are as follows
1. 10 contracts
2. Exit - 1/2 at 100% of Gap fill
3. Exit - 1/2 at (Gap Fill + 15% of 5d ATR)
4. Stop 5 points
5. Stop to B/E if the price gets to within 2 ticks of Gap Fill
6. Commission $2.40 per contract
In summary, fading both up and down gaps on Fed Day is a losing strategy with a profit factor of 0.82 and profitable 59% of the time. The best is to only fade down gaps on Fed Day as this has a profit factor of 1.76 (tidy return) and is 67.3% profitable. The lesson from this study would be to sit on the sidelines on Fed Day when it gaps up as it is a losing strategy with a PF of 0.48 and only look for a gap fade on a gap down.
Good Trading and may all your trades have fat tails and flat distributions
Here is a study that I did just recently the numbers are fairly mind blowing but consistent with a lot of sources. The analysis was done from 19 Oct 1999 to 16 Oct 2009 so approx 10 years worth of data was used, test was with no stop just looking for gap fill. So are you sitting down….
the winners are Tuesdays, Wednesdays and Thursday as the best days to fade gaps 70%, 71.2% and 73% respectively as the probability of a gap fill on the ES and 65% - 69% closed within the first hour of trading. In fact the first 15mins was the largest percent of all gaps closed for all days of the week.
Hope this helps and may all your trades have fat tails and flat distributions!
Well the bears are in town! Yes here is my unfilled gap chart that highlights that we have 1009.50 as an unfilled gap magnet which lines up closely to the 89EMA on the daily and after Fridays session it all looks very achievable as a near term target!
Yes Traders we look to be in the process of filling in the unfilled gap from the 10/14 which is on the ES futures which is down to 1068.75 and looking at this Market Profile chart and Volume profile we sure look to have little support till that Closing price of the 10/13 which was 1068.75. We may have some support from 1074.50 to 1074.00.
Nonetheless, this is an active trade now at the time of writing the Globex session is trading 1077. Remember Markets do return to fill unfilled gaps at some point!
As in previous post I talked about how unfilled gaps as a general rule return to fill so its worthy of a post to highlight this to you all that on the way down we have some key levels that may present opportunities to trade based off these unfilled gaps.
Unfill Gaps
1. 988.75 back down to 984.50
2. 981.25 back down to 975
This also applies to the other indexes YM (1. 9150 down to 9126 and 2. 9081 down to 9047) and NQ (1610 down to 1602).
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