Larry Williams ; Gap Fade Trading Strategy

August 22, 2010

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Stock and Futures Magazine has an excellent webinar on the Oops Trade, which looks for gaps that reverse.

Sources

  1. Webinar : Technical Strategy: Oops! Trades – Presented by Michael J. Carr, CMT – link

(must register a free account)

Setup

  • For shorts : open above the High 1 day ago
  • Works well on stock index futures, commodity futures, and volatile stocks
  • Works particularly well on the Russell 2000 futures

Trigger

  1. Cross below yesterday’s high
  2. Cross above yesterday’s close

Exits

  1. First profitable open – holding overnight consistently works best
  2. However, exit strategy effectiveness Varies by market according to Carr
  3. Does not work well on intraday time frame
  4. SP is about a 3 day hold on average
  5. SP futures used a 7 point stop

Results

  1. 78.4% winners on the SP futures since 2000
  2. 74.2% winners on a basket of futures contracts

HistorySquared Notes

Some other ideas :

  1. Enhancing the strategy with additional overbought and oversold daily time frame filters combined with larger gaps can make this strategy an effective day trading strategy as well
  2. Implied Volatility will likely be high in the options markets on these gaps, so a credit spread may benefit from a volatility collapse
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