Monday August 1st Weekend FX gaps, page-7

Hi PT

You're welcome, I'm more than happy to discuss/exchange ideas.

For gap trades I think the toughest question to crack in order to develop a robust risk-managed system is how to set the stoploss. So far what I have (the time based method) is in my view a stopgap measure.

Even if the data says 100% of gaps close, do I really want to have 1 or 2 gaps open potentially for more than a year & $1000's in the red before it returns to close the gap for a profit?

I am still modelling the results of different options, for example:

1. If 92 out 100 gaps close within 5 days, simply close out those gaps that are still open after 5 days & take those losses. Based on the data I have accumulated, I calculate the profit from the 92 gaps closed within 5 days will more than cover the losses from those 8 losses, offering a still healthy net profit when averaged over those 100 trades.

2. The data also says that those 8 gaps will close, its just a question of when. I am still analysing a robust way to decide when to re-enter those gap trades before they close, to recoup some of the losses incurred when I exit them after 5 days. For example, if a gap opens out to > 500 pips but returns to < 100 pips from closing the gap, regardless of how long, 7 out of 8 of those gaps will close once they inside that 100 pip level. This effectively improves the overall net profit from the 100 trades because I have written off 8 trades but at a later point I can reduce those losses by offsetting the deferred profits from those gaps when closed.

3. I have looked at taking out opposing contracts so that I have a net position on trade entry (for example 2 contracts to close the gap, 1 contract away). If the gap closes well then I have profit from 1 net contract. If the price moves away from the gap, the away contract is in profit, but the gap close contracts obviously will be in double that in loss. But I can close that away contract at some point and add to the gap close contracts. I think this adds significant decision complexity and have yet to make my mind up about this approach, but nevertheless will model/test it.

4. Similar to option 2, but instead of using the time factor (gaps still open after 5 days) simply choose a stoploss level that may stop out more of each 100 gap trades, but at a lower loss per trade stopped out. For example the data says only 6% of gaps swing out to more than 250 pips away from the gap. So if I take 6 losses at 250 pips each, how much profit does 94 closing trades generate compared to that - my data says I will still make a good overall net profit, but I am evaluating different levels to see if I can optimise the equation.

5. Then there is the option for simply leaving the trades open - the assumption being they will all eventually close, so no need to sacrifice any stoplosses - the question here is what is the carrying cost?

As to platforms, I am using IG Markets. I have been with them for almost 10 years & I'm quite happy with them. The ProRealTime charting package is really good. The spreads on FX I believe are very competitive, although on Monday mornings when I want to do these gap trades, they are typically higher due to low liquidity at that time. I have also recently signed up to FP Markets, but am yet to really try their Metastock package and how they compare to IG. I signed up to FPM because they are very proactive in educating traders and have done a couple of seminars/webinars with them & they have given me some great insights (even though I have been trading for 10 years, and been a TA based trader for most of that time). In return I am happy to give them some of my trading business - win/win.

The idea of trading gaps on some of those multiple listed stocks has crossed my mind and does appeal to me. But I have chalked that onto my todo list as something I want to collect stats on and test once I have bedded down these fx gap trades and a couple of other techniques I have learned from the guys at FPM. It is interesting that you have been down that path, it'd be great to compare notes as this progresses.

Cheers, Sharks.