Fade The Gap: A Strategic Approach to Trading Index Futures

Imagine the opening bell on Wall Street, signaling a flurry of activity as stocks gap up or down. Amid this rush, the strategy of fading gaps focuses uniquely on the 9:30 AM EST candle. Rather than chasing the initial momentum, I wait for this pivotal moment to take a contrarian stance. If the S&P 500 opens significantly higher, I consider a potential reversal as enthusiasm may wane. Conversely, a sharp gap down prompts me to watch for a bounce back as panic subsides. It's a calculated approach rooted in market psychology, where patience and precise timing can yield profitable opportunities amidst the initial volatility. Fading gaps at 9:30 AM EST isn't just about trading against the grain; it's about finding clarity amidst the chaos and leveraging the market's tendency to correct itself after an exaggerated start.

This is what I do every morning as part of my trading routine, drawing inspiration from John Carter, whose comprehensive coverage of this strategy can be found in his insightful book titled "Mastering the Trade."

Now, you may be asking, "What are the rules?"

THE ENTRY RULES

1. Timing the market open: Wait for the 9:30 AM EST candle after the NY session opening bell. Make sure you have your chart set to RTH (Regular Trading Hours) and not ETH (Electronic Trading Hours)
2. Identify Significant Gaps: Look for substantial gaps in the Index price compared to the previous days close. I Do Not trade if the gap is less than 1 point (4 ticks), or over 0.75%. These have proven to produce more losses than it's worth.
3. Contrarian Approach: Take a contrarian stance against the initial gap direction. If the futures gap up sharply, consider shorting once the price shows signs of weakness. Conversely, if there's a sharp gap down, look for buying opportunities as the market potentially rebounds. My entries are usually within the first 30 seconds of NY session market open.
4. Position Size: This is the most important part.

1. Less than 0.10%: Full position size (16 MES Contracts $20 per tick)
2. Between 0.10% and 0.25%: 3/4 position size (12 MES Contracts $15 per tick)
3. Between 0.25% and 0.50%: 1/2 position size (8 MES Contracts $10 per tick)
4. Between 0.50% and 0.75%: 1/4 position size (4 MES Contracts $5 per tick)
5. Greater than 0.75%: Avoid trading or consider scalping, though I rarely scalp unless the $TICK index exceeds 1000 or falls below -1000 at open.

THE EXIT RULES

1. For Gaps under 0.50%: Close the position when the opening gap is completely filled. Set a stop-loss at the size of the opening gap in the opposite direction of your trade.
2. For Gaps over 0.50%: Close the position when the price has moved in your favor equivalent to 50% of the of the opening gap. Place a stop-loss at 50% of the opening gap, opposite to your trade direction.

These rules simplify the exit strategy based on the magnitude of the opening gap, ensuring a structured approach to managing trades and maximizing profitability while effectively controlling risk in Index futures trading.

I am currently developing a script for TradingView to gain deeper insights into the data on opening gaps. Once the script is finished, I will update these rules accordingly.

SUMMARY

My trading routine centers around fading gaps in the S&P 500 index futures, employing a contrarian strategy that emphasizes patience and precision at the 9:30 AM EST market open. Inspired by insights from John Carter’s "Mastering the Trade," I wait for significant gaps, applying strict entry and position sizing rules to manage risk effectively. The exit strategy, tailored to the size of the opening gap, aims to capture profits while limiting losses with strategic stop-loss placements. As I continue refining my approach with the help of a custom TradingView script to analyze opening gap data more comprehensively, I remain committed to adapting these rules for optimal trading performance.

GAP STATISTICS

UPDATES

July 1, 2024: Added contract size to Rule #4 Position Size.
July 3, 2024: Added price per tick for each position size.
July 5, 2024: Added Gap statistics pulled from TradingView script

July 1, 2024 WIN

Fade The Gap: +55 Ticks (13.75 Points)

ES futures opened up ~0.19%, closed the gap in 25 min for +55 Ticks or $825.00 based on 3/4 size of 12 MES contracts.

July 2, 2024 WIN

Fade the Gap: +71 Ticks (17.75 Points)

ES Futures opened down ~0.31%, closed the gap in 15 min for +71 ticks or $710.00 based on 1/2 size of 8 MES contracts.


Cumulative Weekly Total:

1. 126 Ticks
2. $1535.00

July 3, 2024 WIN

Fade the Gap: +21 Ticks (5.25 Points)

ES futures opened down ~0.09%, closed the gap in 5 min for +21 ticks or $420.00 based on full position size of 16 MES contracts.


Cumulative Weekly Total:

1. 247 Ticks
2. $1955.00

July 5, 2024 WIN

Fade The Gap: +4 Ticks (1 Point)

ES futures opened 0.01%, almost too low to play. However, the gap was closed within 30-40 seconds for 4 ticks or $80.00 based on full position of 16 MES contracts.



Cumulative Weekly Total:

1. 251 Ticks
2. $2035.00

Weekly update this weekend. We went 4/4 this week.

Weekly Update: July 1 - July 5

Attached Image (click to enlarge)

July 8, 2024 LOSS

Fade the Gap: -28 Ticks (-7 Points)

ES futures opened up ~0.13% and continued to run. Stop was hit in 5 min for -$420.00 based on 3/4 position of 12 contracts.



Cumulative Weekly Total:

1. -28 Ticks
2. -$420.00

July 9, 2024 LOSS

Fade the Gap: -34 Ticks (8.5 Points)

ES futures opened up ~0.20% and continued to run. Stop was hit in 210 min for -$510.00 based on 3/4 position of 12 contracts.



Cumulative Weekly Total:

1. -62 Ticks
2. -$930.00

Is no-one trading gaps anymore? This used to be my bread & butter.

I still trade them, I'm just lazy about updating this thread.