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Gap Size and Penetration Size

As you know, some price gaps are relatively small while others are relaВэtively large. In researching the gap trades I've found that larger price gaps tend to produce more reliable (i.e., more accurate) signals. I've 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 jew, if any, systems can be applied to the marВэket 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 paraВэmeters and rules I've 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 conВэtract 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 willingness to assume more risk by trading larger posiВэtions, and 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. Pay close attention to the markets, follow those gaps, and when the big moves occur, you will be on board. If you're not following the gap signals closely, then you can't be on board the big moves. It's 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 you're going to be a follower of the gap trades, and if you have studied them sufficiently to have conВэfidence in their potential, then by all means trade them religiously.