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shodson's Trading Journal
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shodson's Trading Journal

  #601 (permalink)
 Vendor: www.probabletrades.com 
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2010 MTG Gap Analysis

It assumes trading all gaps (no filters) but using MTG stop and gap minimums.

Video: MTG 2010 Gap Analysis

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  #602 (permalink)
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I think I'm gapped out

Tuesday, February 1st, 2011 - I got a gap fade loser on TF. In hindsight, I should not have taken this trade since it was beyond my max gap size filters, but I guess I overlooked that when I set it up.

TF: -37 ticks

I think I'm going to quit MTG, and here's why: I don't think their way of trading matches my psychological profile very well. Historically, I get about 1.2 or 1.3 profit factor with 60-70% win rates. This is pretty typical with their gap guide data, so it is profitable, and I'm inline with expected results of their data. However, I hate these large losses, then spending several weeks or months trying to recover, and then hoping I can get ahead. If you think about it, if you're winning 60-70% of the time with a more normal R:R your profit factor should be closer to 2.0 or 3.0.

Let's say risk = $50, reward = $50, and we have 100 trades

60%: (60 wins * $50/win) / (40 losses * $50/loss) = 1.5pf
70%: (70 wins * $50/win) / (30 losses * $50/loss) = 2.3pf

Now lets say my reward is 2x my risk:

40%: (40 wins * $100/win) / (60 losses * $50/loss) = 1.3pf
50%: (50 wins * $100/win) / (50 losses * $50/loss) = 2.0pf
60%: (60 wins * $100/win) / (40 losses * $50/loss) = 3.0pf
70%: (70 wins * $100/win) / (30 losses * $50/loss) = 4.7pf

Having a PF of 1.2 with 60-70% win rates shows how lopsided the R:R is.

I think I'd rather trade a system with a high profit factor even if it only wins 40% of the time. I don't mind losing as long as I know a couple of good days are going to get me back in the game.

As far as MTG goes, they are an honest and up-front vendor, and I wouldn't ever want to discourage anybody from checking them out. However, like I said earlier, I think it doesn't feed my psyche as well as I'd like. Part of my journal is figuring out what works for me, and although I can be profitable, I don't like having to recover from such large draw downs.

With that said, January was a fairly experimental month, and I didn't strictly follow my gap trading plan and played with some other setups. Unfortunately I missed some nice gap winners early in the month and made some expensive mistakes (like today) by not following my plan better. So, I'm looking for other setups, preferably with-trend and better R:R. However, I should continue to strictly stick to my trading plan until I'm ready to ditch it completely, otherwise half-heartedly following your plan is probably worse than following a bad plan. In fact, I was tired yesterday and didn't feel like setting up my gap fading strats so I didn't bother. Sure enough, I would have had an 11 tick ES winner today (Feb 2nd) if i did.


Last edited by shodson; February 2nd, 2011 at 06:16 PM.
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  #603 (permalink)
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I'm currently coding a NinjaTrader strategy to trade the gap after the weekend in the forex markets, and I can appreciate your problem entirely. From my point of view, the best way to reduce the RR ratio is to filter out the small gap trades. If the gaps you trade are bigger, and if you use the same stop size as before, you should get a better RR - although you'll get fewer trades of course. Also increase the upper size limit. Steenbarger and his followers are quite convincing with the 40% max filter, but that is literally just a statistic and it doesn't tell the whole story. Having a bigger upper limit may well work fine. I'm doing backtests on a whole load of data on this methodology so I should know soon - as far as the forex markets are concerned - but the number crunching takes its time.

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  #604 (permalink)
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Adamus View Post
I'm currently coding a NinjaTrader strategy to trade the gap after the weekend in the forex markets, and I can appreciate your problem entirely. From my point of view, the best way to reduce the RR ratio is to filter out the small gap trades. If the gaps you trade are bigger, and if you use the same stop size as before, you should get a better RR - although you'll get fewer trades of course. Also increase the upper size limit. Steenbarger and his followers are quite convincing with the 40% max filter, but that is literally just a statistic and it doesn't tell the whole story. Having a bigger upper limit may well work fine. I'm doing backtests on a whole load of data on this methodology so I should know soon - as far as the forex markets are concerned - but the number crunching takes its time.

Actually, one of the things I've had on my to-do list is to upgrade my gap fading strategy to wait for the gap to get larger after the open if the market opens in a favorable zone. I will miss the ones that go on to fill without any heat, and still catch every loser, but my losers will be smaller and my winners larger, so it's just a matter of missing out on the small gaps that quickly fill will pay for the lower win rate. For example, if I get a 1 pt gap, and I would usually have a 5pt stop let's say, (5:1) I'd wait for the gap to increase to 3 pts (2pts larger than at the open) and then use a 3pt stop (1:1). Most gaps don't fill without heat, so entering a gap trade on a pullback to wait for a larger gap often works better.

Interesting in looking at forex weekend gaps. Have you ever considered what I call Globex gaps? See these links #1 #2

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  #605 (permalink)
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shodson View Post
Actually, one of the things I've had on my to-do list is to upgrade my gap fading strategy to wait for the gap to get larger after the open if the market opens in a favorable zone. I will miss the ones that go on to fill without any heat, and still catch every loser, but my losers will be smaller and my winners larger, so it's just a matter of missing out on the small gaps that quickly fill will pay for the lower win rate. For example, if I get a 1 pt gap, and I would usually have a 5pt stop let's say, (5:1) I'd wait for the gap to increase to 3 pts (2pts larger than at the open) and then use a 3pt stop (1:1). Most gaps don't fill without heat, so entering a gap trade on a pullback to wait for a larger gap often works better.

Interesting in looking at forex weekend gaps. Have you ever considered what I call Globex gaps? See these links #1 #2

Shodson
I think your strategy would work well with CL. I had some good success with CL gaps, but gave up due to the large stop losses that I had. What I noticed is that CL has a really strong tendency to go to at least the 1/2 gap point (which can be quite a few ticks). I gave up on the CL gaps in Nov or so, but I think it is a fruitful area.
Papa15

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  #606 (permalink)
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shodson View Post
Actually, one of the things I've had on my to-do list is to upgrade my gap fading strategy to wait for the gap to get larger after the open if the market opens in a favorable zone. I will miss the ones that go on to fill without any heat, and still catch every loser, but my losers will be smaller and my winners larger, so it's just a matter of missing out on the small gaps that quickly fill will pay for the lower win rate. For example, if I get a 1 pt gap, and I would usually have a 5pt stop let's say, (5:1) I'd wait for the gap to increase to 3 pts (2pts larger than at the open) and then use a 3pt stop (1:1). Most gaps don't fill without heat, so entering a gap trade on a pullback to wait for a larger gap often works better.

Interesting in looking at forex weekend gaps. Have you ever considered what I call Globex gaps? See these links #1 #2

Great idea. I spent some time coding that up today, although I messed it up so I spent a long time churning CPU cycles for nothing. But my first stab at it is to put the entry half way from the Open to the stop loss - but that really really restricts the number of trades. If I find anything useful, I'll pass it back this way. re the links - I can't get them to work for me. They send me to the top of the page. I think I remember you mentioning it though - you were talking about trading the gaps on Globex currencies I think.

You can discover what your enemy fears most by observing the means he uses to frighten you.
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  #607 (permalink)
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this may sound stupid to you, but even if you get 5 trades a months with a very high profit factor can be traded....
Not everything has to be a day trade for it to be profitable. All your doing is looking for inefficiencies to exploit.

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  #608 (permalink)
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Friday, February 4th, 2011 - Picked up 3 gap winners. They still would have been filled for winners if I entered with a 1.0 R:R pullback. with larger profits and less risk, but I'm not done coding that part of the strategy yet. Still, I'm pleased with today's results.

ES: +17 ticks
YM: +27 ticks
NQ: +12 ticks

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  #609 (permalink)
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Monday, February 7th, 2011 - OUCH. If I had my improved R:R feature implemented I wouldn't have lost as much money. Also, the NQ actually touched my target before turning around and stopping me out. I let a winner turn into a loser.

ES: -20 ticks
YM: -50 ticks
NQ: -50 ticks

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The trend was not my friend


Tried to get short on a pullback, on the first meaningful of the European session on 6E, the trend reversed against me.

6E: -20 ticks

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