{"id":7431,"date":"2011-06-02T00:01:17","date_gmt":"2011-06-02T04:01:17","guid":{"rendered":"http:\/\/club.ino.com\/trading\/?p=7431"},"modified":"2011-06-01T15:02:17","modified_gmt":"2011-06-01T19:02:17","slug":"avoid-losing-setups","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2011\/06\/avoid-losing-setups\/","title":{"rendered":"Avoid Losing Setups"},"content":{"rendered":"

\"\"Our friend Scott Andrews, a West Point graduate and former CEO of a public company, is now Founder and President of MasterTheGap.com. Today he is going to share an interesting perspective in this article on using historical probabilities. For a limited time to Traders Blog readers, Scott is offering a complimentary historical research study on opening gaps in the S&P 500.\u00a0 If you enjoy this article, you may wish to download his complimentary SPY Gap Study HERE<\/a>.<\/p>\n

--------------------------------------------------------------------------------------------------------------------------------------------------------------<\/p>\n

Maybe you shouldn\u2019t try to kiss all the pretty girls?<\/strong><\/p>\n

In the timeless words of Sir Winston Churchill, \u201cThose who fail to learn from history are doomed to repeat it.\"<\/p>\n

Though Churchill was not speaking of the markets, the concept is certainly applicable. In fact, the easiest way to make money trading the markets, is to avoid those setups that have been unprofitable historically.<\/p>\n

Many folks obsess over trying to trade every winning setup. I do not. I am a gap fader. When the historical probabilities are favorable, I will short \u2018up\u2019 gaps and buy \u2018down\u2019 gaps. Since more than 70% of all opening gaps have filled the same day historically in the U.S. indices, I do not need to catch every winner to be successful.<\/p>\n

In fact, I\u2019ve had my best success focusing on simply trying to avoid the majority of the losing setups. Let\u2019s a take look a look at a real market example. <\/p>\n

Had you hypothetically faded every trade-able opening gap since 2004 in the SPY (S&P 500 ETF), using a reasonable size stop to accommodate post-open volatility (e.g. 30% of the 5 day ATR), you would not have made much in profits:<\/p>\n

\"\"<\/p>\n

Now let\u2019s look at these results segmented by day of week \u2013 one of the easiest filters to incorporate into your trading plan:<\/p>\n

\"\"<\/p>\n

As you can see, fading \u2018up\u2019 gaps in the SPY on Mondays and Wednesdays since 2004 has been a money-losing scenario.<\/p>\n

So, what if you simply excluded fading \u2018up\u2019 gaps on these two days? Here are the historical results:<\/p>\n

\"\"<\/p>\n

The total number of trades decreased by 23%, while the total net profits increased by 43%! This is pretty astounding when you consider the simplicity of the concept. And though these results are still not compelling and worthy of trading in my opinion, the dramatic improvement in profitability illuminates the value of avoiding the weakest setups.<\/p>\n

A word of caution: taking this concept too far can result in \u2018curve-fitting\u2019- a risk when creating a strategy based on historical data. However, excluding historical scenarios that have occurred frequently and been significant money losers seems prudent and has worked well for me personally.<\/p>\n

If identifying the best and worst scenarios for trading the gap in the S&P 500, or one of its component stocks is of interest to you, then help yourself to my complimentary historical research study on opening gaps in the S&P 500:<\/p>\n

Download SPY Gap Study HERE.<\/a><\/p>\n

Whether you are a gap trader or swing trader this information can help you. If nothing else, it should help you avoid the urge to \u2018kiss all the pretty girls!\u201d<\/p>\n

Here's to probabilities not possibilities,<\/p>\n

Scott Andrews
\nPresident & Founder
\nMaster The Gap, Inc.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Our friend Scott Andrews, a West Point graduate and former CEO of a public company, is now Founder and President of MasterTheGap.com. Today he is going to share an interesting perspective in this article on using historical probabilities. For a limited time to Traders Blog readers, Scott is offering a complimentary historical research study on […]<\/p>\n","protected":false},"author":41,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[3866,3867,2299,2074,3868],"class_list":["post-7431","post","type-post","status-publish","format-standard","hentry","category-general","tag-gaps","tag-historical-probabilities","tag-scott-andrews","tag-sp500","tag-spy-gap-study"],"yoast_head":"\nAvoid Losing Setups - INO.com Trader's Blog<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.ino.com\/blog\/2011\/06\/avoid-losing-setups\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Avoid Losing Setups - INO.com Trader's Blog\" \/>\n<meta property=\"og:description\" content=\"Our friend Scott Andrews, a West Point graduate and former CEO of a public company, is now Founder and President of MasterTheGap.com. 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