Many take positions just before market closes with the intention of making money in the opening gap. This more or less becomes a gamble as they don't "know" the direction of open. If it opens against their position, they may close in panic incurring a loss.
Would it better to trade the opening gap after the market opens? The gap theory is that all gaps are closed. The shortcoming of that theory is that it does not say when the gap will close. For the intraday trader if he can have probability on his side that the gap will close the same day, then he can take a position.
I looked at a very minuscule data sample of just one month. September 2009.
We had 20 trading days. On 5 days the opening gap was insignificant.( I considered gaps of less than 15 points as not worth trading.) On 15 days we had gaps we could trade.
On 6 days there was a negative gap (range 20 to 38) and on 9 days positive gaps (range 17.5 to 47). On 4 of the 15 days, the gap was never covered; the opening was almost the day's low/high. After opening, the market of course moved in both directions. Suppose we had taken a trade at opening what would have been the result? Remember that on 11 out of 15 days, the gap was covered. I have taken the gap as covered if the price dropped to +/-5 points towards the previous close.
Enter at the opening gap. Short if the gaps is positive and long if gap is negative.
Stops: 25 points from entry.
Exit: For shorts: Previous close+5, For longs: Previous close-5
Example:
Trade of September 03. Open=4639
Previous close on 02 Sep = 4614.35
On 3rd NF opening gap of 24.55.
Entry: Short at 4639, stops @ 4664. Exit at 4619.35
I have taken the gap as closed if the price dropped to 4619.35 giving profit points of 19.55. This is basically a filter. Same way for gap down opening; 5 points below the previous close. On many days trade could have been taken closer to stops, thus increasing the profits and reducing the losses as NF continued to move in the direction of open.
If we had taken a position at opening (theoretical price) and closed it when it touched our filter level and used a stop loss of 20 or 25 points this would have been the result
Adding the opening gap points for 11 profitable days gives 275 points.
25 points stops 4 days gaps did not close =100points
Net points= 175 on 15 trades. Taking 5 points per trade for cost would have left us with a net point of 100 points.
20 point stops: 6 days. Stops 120 points. Net points = 275-120=155 points. After cost would have left us with 80 points for the month.
Traders taking overnight positions can also perhaps have a stops of 20-25 if their trade has gone against them and wait for the gap filling.
I have attached the excel sheet giving the details.
Caution: Insignificant sample size. This is just an idea floated for the involvement of others.
Do not take the EOD data of OHLC to test this strategy. OHLC does not say when High/Low was achieved and whether High came before the low or vice-versa. It also does not say if the gap was closed before achieving the high/low. I have looked at the tick data for all calculation.
Data Source: Close: NSE, Tickdata: chatreader.co.in
TT
Would it better to trade the opening gap after the market opens? The gap theory is that all gaps are closed. The shortcoming of that theory is that it does not say when the gap will close. For the intraday trader if he can have probability on his side that the gap will close the same day, then he can take a position.
I looked at a very minuscule data sample of just one month. September 2009.
We had 20 trading days. On 5 days the opening gap was insignificant.( I considered gaps of less than 15 points as not worth trading.) On 15 days we had gaps we could trade.
On 6 days there was a negative gap (range 20 to 38) and on 9 days positive gaps (range 17.5 to 47). On 4 of the 15 days, the gap was never covered; the opening was almost the day's low/high. After opening, the market of course moved in both directions. Suppose we had taken a trade at opening what would have been the result? Remember that on 11 out of 15 days, the gap was covered. I have taken the gap as covered if the price dropped to +/-5 points towards the previous close.
Enter at the opening gap. Short if the gaps is positive and long if gap is negative.
Stops: 25 points from entry.
Exit: For shorts: Previous close+5, For longs: Previous close-5
Example:
Trade of September 03. Open=4639
Previous close on 02 Sep = 4614.35
On 3rd NF opening gap of 24.55.
Entry: Short at 4639, stops @ 4664. Exit at 4619.35
I have taken the gap as closed if the price dropped to 4619.35 giving profit points of 19.55. This is basically a filter. Same way for gap down opening; 5 points below the previous close. On many days trade could have been taken closer to stops, thus increasing the profits and reducing the losses as NF continued to move in the direction of open.
If we had taken a position at opening (theoretical price) and closed it when it touched our filter level and used a stop loss of 20 or 25 points this would have been the result
Adding the opening gap points for 11 profitable days gives 275 points.
25 points stops 4 days gaps did not close =100points
Net points= 175 on 15 trades. Taking 5 points per trade for cost would have left us with a net point of 100 points.
20 point stops: 6 days. Stops 120 points. Net points = 275-120=155 points. After cost would have left us with 80 points for the month.
Traders taking overnight positions can also perhaps have a stops of 20-25 if their trade has gone against them and wait for the gap filling.
I have attached the excel sheet giving the details.
Caution: Insignificant sample size. This is just an idea floated for the involvement of others.
Do not take the EOD data of OHLC to test this strategy. OHLC does not say when High/Low was achieved and whether High came before the low or vice-versa. It also does not say if the gap was closed before achieving the high/low. I have looked at the tick data for all calculation.
Data Source: Close: NSE, Tickdata: chatreader.co.in
TT