I want to make several observations of a technical nature. By nature, that is what most interests me but I am a trader as well and have some experience with opening gaps.
Your description of the manual system makes it seem like a very easy system to implement. Actually it is very difficult to do and many coders would probably avoid taking on this task due to the complexity of the challenge involve.
Specifically I am referring to rule 1 which states "1. Look for the currency cross that has created the largest gap. (Most of the time, these are exotic crosses...but sometimes they're major crosses as well.)". EAs can easily be written to run on any currency pair for any time frame, but to write one that scans multiple currency pairs and triggers a trade for the optimum one is very difficult. Even if it was coded and working properly, it is impossible to backtest with MT4 Strategy Tester. I won't go into all the technical jargon to explain why, but simply put strategy tester can only trade the currency pair that it is attached to.
Besides you're right with all mess of testing this strategy, thread owner have very good chances. He also post statistics and the proposed fade is an old rule on forex.
interesting and logical method
*These are the targets that I've found to work the best since some gaps will go within one or 2 pips of filling, and then turn against you.
This is an interesting and logical method and gap filling is a well know price action but under utilized by most traders, so congratulations on lifting the veil on this and giving it new life. One thing i just cant understand is why you allow for the spread twice, if price comes back to fill the gap you only pay spread once? also if the price was within 2 pips of closing the gap wouldn't you have already set your stop loss to break-even?
There actually is some logic behind this rule:
1. These gaps have a very high probability of filling...if you use my criteria properly.
2. I've based the criteria on personal testing and trial and error. And there is absolutely nothing worse than watching a gap come within a few pips and then turn against you only to trip your stop.
3. Leaving your hard stop in place is an integral part of the rule set for trading this plan. This is because whenever you move your stop closer to current price action, you decrease your chances of profit. When you decrease your profits (or your chances of hitting your profit target), you change your overall expectancy. I've seen some gaps chop around for almost a week before filling. This strategy is about 90% accurate, generally risking 4 units to make 1 unit. When you start tinkering with your 90% probability rate, you potentially set yourself up for less profits over time; and possibly having an end result of no profits, depending on if or when you take a scratch trade that should've been a profit...etc.
4. Believe it or not, there actually is some logic behind the exit rules, since more volatile currency crosses tend to have higher spreads. The gist of the exit rule is basically what I've found to work the best. It is not time to get greedy within a few pips of a gap fill. (One time I was long NZD/USD on a gap down, this is obviously before I made my "gap fill -1 pip, -spread" rule...and the New Zealand govt. decided that they were going to sell millions of dollars of their own currency, sending the Kiwi plummeting, because "the value of their currency was unjustifiably high"...1 pip before gap fill!!! This ended up costing me almost $2,000. And it's a lesson I will never forget.)
5. There is a myriad of ways to play gaps. I know people that only play gaps on the major crosses...Some people scale into a position to lessen their risk...some people scale out of their position to cut risk and try to gain more profit overall. While others stick strictly to a 100 pip hard stop. You could move your stop to breakeven when price action nears gap fill if you'd like. It may not be a bad idea. But the fact is, I haven't researched it...and I don't have facts or data to support that it works any better than what I've come up with. However, you do make a good and valid point.
6. The systematic way to play gaps that I've posted here is meant to be "set and forget" because of the fact that it is what I've found to work the best for a "set and forget" trade. I used to spend many Sundays watching the market, trying to figure out and optimize ways to play these gaps. But what I've come up with is simple and straight forward: Pick your gap, give it a big enough stop, set your target, shut the computer off, go about your day.
7. Please feel free to explore and tweak this idea as you see fit. But, remember, with a 4 to 1 risk to return, maintaining a high probability of winners should be of utmost importance in this delicate balance.
Hope this helps.
Good Luck! and Good Trading!
Thanks for the input
Thanks for your input. I didn't figure that this would be an easy job. Although I have been told by some coders that some sort of search/loop function could actually find the biggest gap. Maybe it is possible in Tradestation only?
I don't know, I'm not a coder. However, it would be nice to just have a PC running on Sunday that sets up a trade, rather than have to drop everything and take 48 whole seconds of my own time up to set up the trade manually. lol.
The EA that I'm looking for is simply in case I wouldn't be home to take the trade manually, that's all.
Thanks for shedding some light though.
i thought mt4 could do anything that TS could do, programming wise.
If you coded this to operate on just the chart pair then added in some inter-EA communication code where each "GapFill" EA could advertise there potential and bow out to the better one.
Then you could back test this as the EA would communicate and find that it was the only one, thus it would take the trades.
And as a bonus it would only consider the pairs that you had attached to charts.
Also the code would be cleaner due to not having to deal with stepping outside the chart pair boundary and the spreads and TP, SL settings could be tweaked per pair.
As an alternative, perhaps just make it for single pairs but highly discrimatory, Would perhaps only take the trade if 40 pips gap.
early monday gap -- must be filled theory
I would not trade with that
first -- the pip spread is tremendous in the first 20 min to 1 hours when the market start
second -- sometime, the gap direction indicate a secret decision like Greece deal in euro zone, so the trend will be building upon the gap direction
maybe the gap will still be filled within half a day or in the next 6 hours -- but risking quite a lot -- if you don't have intermediate strategy
----- many traders are still drunk and hang over and will not participate the trade on monday morning, so price could be very manipulative
but we are glad that you find such BIG GAP HOLE to make you happy
an alternative explanation about the gap -- is
during late evening friday, some customer orders has not been filled,
so the last 3 hours of last friday -- is related to the gap formation
I took a quick stab at an EA for this idea.
NO, I haven't tested it yet. Need to wait until Sunday at market close to attach the EA.
I coded the EA to check these 19 pairs:
EURUSD, USDJPY, GBPUSD, USDCHF, USDCAD, AUDUSD,
NZDUSD, EURGBP, EURJPY, EURCHF, GBPCHF, AUDJPY,
CHFJPY, EURCAD, EURAUD, AUDCAD, AUDNZD, NZDJPY,
Most brokers have these pairs right? (I'm using IBFX)
Anyone can feel free to improve the code if necessary. Like I said, it hasn't been tested yet, so it may need some tweaking, especially in the TP & SL parameters.
Heat lists the % of the size of the gap that the trade went against you before it filled. For example, if it was a 30 pip gap, and the heat is 100%, then you would've seen the trade go 30 pips against you, before it filled.
Notice that the most heat that we took on a trade was 341%, precisely why our stops are placed at 350%, to keep you in the trade.
I noticed that if a trade goes against you more than 350%, it generally rips your head off (goes against you even more, sometimes hundreds of pips), or it just doesn't fill.
Hope it helps.
This shows that in 2008 it only made 600 odd pips less deductions for spread, etc. So, maybe a profit of around 400 pips in the year. Is that good? It seems rather low to me.
GapSeeker took this long trade on GBPJPY when the market opened today:
This gap was over 100 pips!