Scott Andrews shows that gaps can be traded!

I got to know about Scott Andrews (aka The Gap Guy) from Corey's blog.

In a presentation I gave to a group of over 140+, I talked about how I sieved out better quality trading resource. Traders who demonstrate success of their trading strategy/system with statistics always catch my attention. Scott Andrew is one such trader. Furthermore, he specializes in something close to my heart - GAPS. Yeap, I traded gaps for over a year before giving it up altogether.

During that time, I also did a fair amount of research on gaps. But I never thought of doing it Scott's way. Well, in the first place, I was taught to trade gaps in a unorthodox way. Scott fades gaps primarily. He has with him tons of statistical research on which gap patterns are risky and which gap patterns have a high probability of winning. His statistics are significant because of the large sample size. I am blown away.

Now, Scott shares some of his research at his blog - this is free :-) He also runs a paid service at MasterTheGap.com. But allow me to point you to the free Gap Trading Video section where videos related to gaps are posted up daily. A free great learning resource! You may also want to check out his presentation at the Traders' Expo 2009 that talked about 10 patterns that every trader should know. Also check out his trading results.

I am truly inspired.

Unconventional Trading Strategies

In our search for THE trading strategy, I guess many of us have come across dozens of more conventional trading strategies that made use of:

• technical indicators (ADX, MACD, Stochastics etc)


• price action


• support and resistance lines


• candlestick patterns (doji, harami, evening star etc)


• chart patterns (double top, flags, pendants, cup and handle etc)

As I got more acquainted with expert advisors (EA), I was exposed to some trading strategies, which I termed as "unconventional" trading strategies. Basically,  in unconventional trading strategies, they don't use any of the things listed above! So allow me to share some of the unconventional trading strategies that I have come across.

Correlation Trading

In correlation trading, people trade base on the relationship between the same or different trading instruments. I ever heard a course out there teaching people to buy a currency and sell another highly-correlated currency. Supposedly, this will cancel the effect of the currency price fluctuations and the profits will come from the swap. Not a bad idea...one don't have to care about which direction is the currency moving (aka non-directional trading) - provided the 2 currency pairs are REALLY moving in correlation, that is... But my this friend got a hell lot of problem...

Trading mean reversion

My encounter with the PID EA taught me the concept of mean reversion. The main idea is that there is a high chance that price will move back to the average price (more details at investopedia). Interestingly, Dr Brett has the statistics to show that "a disciplined trader can make a living simply trading this pattern".


Gambling and information theory applied to trading

A online buddy introduced this concept to me recently. I have not really dwell into this yet. Basically, some genius managed to represent gambling concepts mathematically such that the parameters can be manipulated and optimization can be done. Another genius applied this to trading. One such application is in Kelly Betting, that applies to money management.


Trading based on probability or other mathematical models

The Hedgecow EA trades base on a such a probability model. The high level concept is that it is highly unlikely to consistent lose for too many trades. So when there is a lose trade, we will increase lot size for the next trade. More details can be found here.

Disclaimer: I am not recommending any EA here. I am just illustrating some novel trading concepts that I have learnt from some of the EAs that I come across. In fact, PID caused many to get margin calls last year.

Five Basic Trading Patterns by Linda Raschke

Was fortunate to find this gem on the Internet and thought I share it with the rest of you.

This is a audio recording (with downloadable pdf material) from Linda Raschke sharing her time-tested five basic trading patterns.

I first read about Linda Raschke from the book "The New Market Wizards". Subsequently, I also came across her in the book "Enhancing Trader's Performance". I got to know about the audio recording from a trading forum that suggested the five basic trading patterns for beginners to start trading with.

This material rocks! I mean, I could recall an educator selling a single strategy for $4000 previously?! That means this material could worth $20,000? Haha.

My take on the seminar:

• This seminar changed my perception of technical indicators. I used to disregard indicators, thinking that the indicators are derived from the price anyway. Linda suggested using indicators to look at price more objectively.


• According to Linda, she has done substantial amount of backtests on these patterns. Well, if you need some trading strategies to start with, why not try these. She has done all the grunt work for you!


• Besides the patterns themselves, Linda also highlighted/reiterated some important pointers (to me):
  
  
  
  • No one special indicator. All indicators ultimately give similar entry signals. Use indicators just as visual aids.
  
  
  • Use of conversation and aggressive entry triggers
  
  
  • She shared some of the entry triggers that she uses eg, 2 period channel breakout, ROC
  
  
  • Sharing on climax exit points
  
  
  • It is ok to be stopped out!

Do check it out. Definitely worth your time.

Oh, and, if you wish to download the sound files to listen to them at your own pace, you may do so here:

Part 1

Part 2

Part 3

Part 4