Gap Size and Penetration Size

As you know, some price gaps are relatively small while others are relatively large. In researching the gap traders Ive found that larger price gaps tend to produce more reliable (i.e., more accurate) signals. Ive also found that just a one-tick penetration is less reliable than a two- or five-tick penetration. The ideal gap size and penetration size for each market is slightly different and will vary over time depending on market volatility and price level. I suggest you monitor your results carefully as to gap size and penetration size.

What You Can Realistically Expect

There are system developers and promoters who will lead you astray, promising you riches untold if you follow their Trading Systems. The fact of the matter is, that very few, if any, systems can be applied to the market totally mechanically for the purpose of generating vast profits. The fact is that day trading, whether by the gap method or any other method, is a business and a skill. It must be learned from the ground up. The parameters and rules Ive given you are valuable and I believe effective, but you are the individual who must implement them in order to generate the profits. And this, my friends, is not an easy proposition.

As you well know, there are myriad factors which impede the path to profitable day trading, whether you are using gaps or any of the other methods described in this book. Therefore, what you can realistically expect is that at first you will find the gaps effective, had you done what the gaps told you to do. Unfortunately, there will be many cases in which you will say to yourself "I should have, I would have, or I could have." These are all excuses. You must follow the gap trades religiously using a certain amount of artistic judgment. However, this is not always easy. One thing I can assure you, however, is that the more you do it, the easier it becomes. And that is certainly helpful.

Realistically, you can expect to make several hundred dollars per contract on average in the gap trades in active markets with a high tick value (i.e., S&P, T-bonds) once you have mastered the techniques. This would be a minimum expectation. The rest would depend on your skill as a trader, your skill in entering and exiting multiple contracts using some of the techniques I have discussed in this chapter.

In closing, I reiterate that many extremely large moves have occurred following gap higher or gap lower openings. Play close attention to the markets, follow those gaps, and when the big moves occur, you will be on board. If youre not following the gap signals closely, then you cant be on board the big moves. Its that simple. While this may sound ridiculous to you, the fact is, that many day traders miss big moves by not following their timing indicators or systems. If youre going to be a follower of the gap trades, and if you have studied them sufficiently to have confidence in their potential, then by all means trade them religiously.

A Few Last Words about Stop Orders

Some of you may be adverse to using buy stops or sell stops as the entry method for the gap trade or for the purpose of risk management. Although you may be suspicious of having resting orders in the markets, thinking perhaps that they will gat you or that the floor will run the stops, you are wrong. This may happen on occasion, but I sincerely feel it is the exception rather than the rule. In very thinly traded markets you may not wish to use such orders; however, in the more active orders I see no problem with using stop orders. If, however, you are still overcome with suspicion and paranoia about the trading floor, then I strongly suggest that you use either a stoop limit order or that you not place an order at all, talking the chance that the market will run right through your price without your being filled.

Consider using stop limit orders where the exchange accepts them. They can be very effective. As you know, however, there will be instances in which stop limit orders will not be filled; therefore, you will have no position when in fact you should have. In the vast majority of cases, stop limit orders will work in your favor. Should you find, however, that your stop limit order was not filled due to fast market conditions, then leave the order active. In many case the market will come back to your price and you will be filled. The risk of using stop limit orders is that you will not be filled. Its a chance you have to take if resting stop orders concern you.

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