Right here is an excerpt from the ebook Understanding Gaps by Scott Andrews. The ebook can be recommended as a bible of gap trading.
Why I Love Gap Trading
Trading gaps is not for everyone. But for me, I consider the opening gap, the ideal trade setup. They occur almost daily, offer plenty of profit opportunity, and are normally short term in nature (1-2 hours). Gap trading offers many other compelling benefits including:
1) Gaps have an inherent bias and edge: over 72% of all gaps in the S&P 500 futures market have filled the same day over the past ten years.
2) They occur frequently (three to four tradable gaps per week in the S&P) so I am not reliant upon catching that “one big winner” to achieve my monthly goals.
3) Gap trading an easy trade to learn and play. No need to “time” the entry – just use a market order at the open.
4) I can prepare in about 15 minutes before the market opens each day. No need to scan hundreds of stocks at night.
5) I can trade them without charts and from anywhere.
6) Getting filled with minimal slippage is not an issue –especially in highly liquid markets like the equity indices and futures markets (S&P 500, NASDAQ 100, etc.).
7) The target is pre-defined so I don’t have to manage the trade after placing it (though sometimes I do to maximize profits).
8) My risks are controlled and limited to a small percent of my account. No overnight risk.
9) Gap trading works in bull and bear markets equally well. I don’t need to predict the market’s next move.
10) They occur in most asset classes (equities, futures, currencies, etc.) and can be traded using stock, options, and futures contracts.
11) I can grow my account several percent per month on average, and often more with this single, simple setup using just one market. No need to baby-sit lots of different markets waiting for that perfect, entry-sensitive trade to appear.
12) Understanding the bias of the market before and after the gap fills, provides a trading edge for the rest of the day while also helping optimize my entries on swing and position trades.
We are sharing a simple Amibroker afl for finding gaps on charts for gap trading. You can freely download and use the Gap trading amibroker afl by clicking the button below. You need an account in Facebook to download this file.
You can immediately see the unclosed gaps on your Amibroker charting software. You may distribute this Amibroker formula to your friends, but do not forget them to refer them to our site.