In the timeless words of Sir Winston Churchill, “Those who fail to learn from history are doomed to repeat it."
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.
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 ‘up’ gaps and buy ‘down’ 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.
In fact, I’ve had my best success focusing on simply trying to avoid the majority of the losing setups. Let’s a take look a look at a real market example.
Had you hypothetically faded every tradable opening gap since 2004 in the SPY (S&P 500 ETF), using a reasonable size stop (e.g. 30% of the 5 day ATR) to accommodate post-open volatility, you would not have made much in profits:
Now let’s look at these results segmented by day of week – one of the easiest filters to incorporate into your trading plan: