Fading the Gap | Trading Futures
good morning everyone and welcome to another fantastic week of education with td ameritrade you have reached trading futures our topic today will be fading the gap utilizing s p 500 futures whether the mini or the micros we'll talk about fibonacci and we'll take a look at the week ahead on the economic front so stick around all right hey it's great to see everyone here on early on a monday morning such a sandeep tony chesapeake we got simi uh edward and mike el diego charles jack ricardo and we got mr ken rose helping out on chat any questions i am unable to get to he'll be more than happy to help and for those of you that are listening in the archive session welcome as well uh and hopefully you're enjoying this session at your leisure you can see my twitter handle on the screen at j mcnichol underscore tda if you wish to follow myself and other fine instructors uh such as ken rose and learn a little more about ourselves as well as about the markets uh like for instance last night had to power out for a few hours uh wasn't sure if we'd have to pull ken in to be uh back up as he teaches a similar class on futures on thursdays and uh certainly glad to have him here but we're up and running today keep in mind content's intended for educational purposes only and not investment advice of any security strategy or account type options not suitable for all investors spread straddles other multi-leg options strategies often involve greater more complex risk than single leg option trades now encourage practice which you learn here today with tools such as paper money software keeping in mind it is for educational purposes and successful virtual trading during one time period does not guarantee successful investing of actual funds during a later time periods market conditions change continuously futures and futures options trading is speculative uh or futures and futures options trading involves substantial risk and is not suitable for all investors please read the risk disclosures for futures and options uh futures and futures options training services are provided by td ameritrade futures and forex llc those trained privileges are subject to review and approval not all clients will qualify and while this webcast may discuss technical analysis other approaches include fundamental analysis may serve very different views and a stop loss order will not guarantee an execution adder near an activation price once activated they will compete or they compete with other income and market orders a brief background on myself if you happen to be new to this webcast welcome uh as uh like ken and many other coaches have been around for a while you can see some of the strategies that i teach along my background and some of my likes and uh might as well put a plug right here right now well there's the uh the twitter handle there at jmcnickel underscore tda you can see start a little fire there and brought out the tiki torches last night when we had the power outage there wondering if i have to go ahead and hit one of local stores and grab some ice to preserve some food but we did all right uh if we go onto td ameritrade website under education and look at those webcasts there that's where you can see our schedule with the week as you're starting off with us here on active trader futures and if you look later in the week uh on thursday great companion class particularly if you're new uh is with uh mr ken rose on the chat with the futures basics and beyond uh that's at 12 p.m eastern time all right let's get on with the show folks our agenda here is uh we're going to talk about fading the gap uh this is a a strategy that is uh somewhat uh non-discretionary or relatively uh non-discretionary uh it's a good way to learn about futures movement and stuff i can't guarantee as far as on the profitability of it over time uh as risk management money management uh comes into play we're going to talk about some fibonacci levels on the week there as well and then we'll round things out on maybe some of the economic news that active traders may want to be keeping an eye out for the week so let's go ahead and bring up the thinkorswim platform and if you notice over on the left-hand margin uh you can go ahead and see there's a twitter handle we're on the trader talks channel if you enjoy what you're listening here today make sure you click like uh also the web link for td ameritrade dot com forward slash futures and also for the chart uh that i'm sharing today which is an example of a daily chart and also a five minute chart with pivot points which we had discussed last week now i'm going to go ahead and zoom in on today's price action and possibly uh already fearful that the setup for today may already be failing uh at the very opening of the market but we're gonna go through this example uh anyway uh the idea being is uh we are below the weekly pivot kind of went below there right at the opening there now we are still potentially holding a low uh from the overnight so if i go ahead and you know kind of bring this out a little bit you can see the five-minute chart from the overnight here is the previous close from friday and what some traders may look to do is see if prices are able to fade or at least go back and test a previous close uh whether on the upside or the downside uh pivot points that we talked about last week you know here's the weekly pivot from a bullish perspective traders would probably would like to see that weekly pivot hold to kind of have that bullish bias if prices are breaking down that momentum may be continuing on the downside and traders may back off from doing a fade however this is already happening after the market open as far as this trade setup the trade setup uh is looking at entering right at the market open and again assuming that prices may fade and trade up to a previous close or if prices were lower a previous day look to fade down to that previous close what we can do is actually take a look at some previous examples of this and this is a five day chart and you can go ahead and back test this on your own as well by going ahead and let me just adjust some here for a moment we'll get back to that later right now i have a five day chart you know if you want you can go ahead and go to the interval there and you can go back this is a five day if we want to go a little bit further we can uh go ahead and whether add another time frame so go back 10 days on a five minute you can see some of that previous price action so if we go back and just back test this over the last 10 days uh you know let's see what this looks like so this is going back to august 2nd okay what i'm going to do is i'm going to mark approximately uh where uh that close is so here's approximately where a previous close was you know sometimes those areas can act as support and resistance you know even in the overnight and albeit a relatively uh quick move let's see if i can adjust that again trying to zoom in on this area here notice where the price open you know there was a quick fade to that previous close you know in this case uh looks like that may have been to the tune we can measure this from that opening price if one was able to enter into that you know going that previous close you know that was about a six point move now as far as a multiplier uh that would be three hundred dollars uh on the forward slash es on the s p futures if we click on the futures tab you can see that multiplier also keep in mind and this could be a little struggle for some traders if they're lower capitalize margins are significantly higher than where they've been historically a lot having to do with volatility that does impact some of the leverage there and also keep mine transaction costs on relatively smaller moves you know if we go ahead and look at forward slash mes which is the micro that multiplier it's about 25 per tick so that's a five dollar multiplier uh notice the margins are smaller there but it's also less leverage and also that six point move uh which had a multipl uh which had a uh that six point move uh which in the case of the forward slash yes would be a three 300 move uh in the micro since it's only a five dollar multiplier would only be a thirty dollar uh uh potential profit and keep in mind there are commissions uh that are tied to that and that can eat up that so keep in mind i'm using this for illustrate purposes but you would have to determine uh for yourself if that's something works for you and also keep in mind some of those transaction costs let's go ahead and take a look uh forward and up on some of these areas so we had looked at uh let's see going back here let's bring up forward slash es which is one we're looking at we go ahead and remove that line zooming in again looking at a a previous let's make sure i got this right here bear with me for a moment okay we had that fade there let's go ahead and take a look at this particular close again all i'm doing is just kind of marking it approximately around that close just for time sake here now you can look in this example notice over the course of the day price did not fade to that close and notice we did have some violation of that weekly pivot which may you know impact that bullish bias now some traders uh may still manage a trade even if it doesn't uh go all the way to that target is keep in mind you know what if prices make about half of that move uh consider profit management and whether scaling and reducing the risk of the trade to a break even so at the very least one's able to walk away with a profitable trade uh not necessarily with uh that full target in mind so again profit management very important let's go and continue on so what this is doing this is an example of back testing so you know we had two examples there uh as we were going forward there and then let's go ahead and take a look uh this is an example on the third day looks like it did not and again part of that oh let's see i'll just kind of highlight there zoom in it actually did retest in the overnight at the opening if one one had faded notice that throughout the day price went up did not come down and fade so this would have been a losing day on that okay going forward now here's an example the fade occurred uh in the pre-market and some traders may use that as an indication on possibly not doing a fade again your results may vary however you know at the opening there was a fade that came very close and again this is where profit management can come into play uh where one has an entry if it makes half of that move and you have multiple contracts you know consider scaling out closing out part of the position reduce the risk on the rest of the trade to a break even so at least two examples on not a positive day but you know potential uh for uh a break even okay um and then just you know continuing on you know you can see these examples again looking at a previous close you know here is a fade to the long side even though it did penetrate a daily pivot kind of veed bottom there in fact i think this is what we looked at last week yeah no no it wasn't last week but uh basically rallied up to that previous close okay and opportunities to possibly trade throughout the day you know whether you know on a trend or utilizing some of those pivot points and again just you can kind of see these examples on you know how this could be just kind of a more of a systematic approach uh on understanding the movement of futures in this case on the s p futures and actually practicing with different types of trades particularly a bracket order where we put in an order with a target price and utilizing a stop so now we did a little back testing on that let's go ahead and i'll show you an example practice trade i did right before we came in and see how that's placed as well as how we can potentially adjust that so with that let's go ahead and take a look at this on the platform and see how this potential trade would be set up so a starting point is going ahead and taking a look at the previous day's close going into the 15 minutes after the hour that would be around this bar right here uh which is the last bar that's showing daylight uh started at 14 10 which means you know that would end at 14 15. okay um now if we go put my cursor on this and look at the c uh for close on that that would be 44 44 61 and a half so we can do we can do this during the pre you know before the equity market opens uh which we're obviously already open right now so we're looking at uh 4461.50
so we can basically plot a horizontal price right at that level now a lot of people ask notice as i move this line notice how it's kind of snapping back and forth this is actually a feature on the thinkorswim platform that you can have turned on simply go to the gear on the chart it's part of the general settings here and where it says snap drawings it may say none which means you got a free float in line that won't snap to anything you put it wherever you want but if you're trying to be a little more precise on some of the price action you can make it ohlc and as the mouse gets close to that particular bar it'll snap as you move it up and down to the open high low close in this case uh you know we're snapping it to that that close as we kind of zoom in okay so if we go ahead that closes 4461.50 you can always right click on the line if you want if you want to make any adjustment it's a little bit hard when the bar is right on top of it right click edit properties looks like i got two lines on there but you can go ahead and change that price okay and let me go ahead and actually remove that second drawing there we go so we got a dashed line there i'll go ahead and zoom that out so that is that potential target and i hate when things don't go as planned but that's okay again that weekly pivot point uh causing some issues as far as with this setup here and again this is kind of a filter that if we are close to that weekly pivot point uh may uh be cautious as far as if the price was to break down may cause us to potentially scrub that trade but we're still walking through it here uh if we go ahead and take a look uh with the risk on the trade what we're going to do is we're gonna go to the daily chart for that and again if you're following along uh this shared grid right here uh if you go ahead and transcribe that you can go to setup in the upper right hand corner uh open shared item and you can go ahead and transcribe and type in that code and that'll bring up something similar to what i'm looking at here i believe the example is going to be forward slash mes all right so i'm going to go ahead and maximize the daily chart and to assign a level of risk on this example we're going to go ahead and take a look at the atr average true range this is an indicator you may be familiar with that with some other classes a lot of coaches may utilize this to help define or set a level of risk for this now uh if we go ahead and take a look at that we're using a five period keep in mind the default period i think is like 14 um but we're using a five period so we're looking at the last five days and if i put my cursor on the previous day it's showing a value of 24.36 okay 24.36 now uh what we can do is whether at this point or once we do the calculation we can round it to the closest quarter that's a personal preference but seeing is it that this trades in quarter instruments we do need to round it at some point what i'll do is i'll use the raw value and we'll round it afterwards so that's 2436. so what we're going to do is we're going to take that value and we're going to add it or subtract it depending on the direction of the trade uh from that previous close okay from that previous close and so if we go ahead and take a look at that you know with that example we're utilizing that was looking at again let me pull this out and what happened here let's go ahead and remove this previous line here actually i'll leave that there uh we're looking at uh 44 61 and a half i believe is with level that we're looking at there so we're going to take that 41 61 50 and we're going to subtract that 24 points and change from that so we're going to go up to the calculator switch gadget i'm going to take 44 61.5
and then minus on that daily value 24.36 to 4.36 and that will equal that that should come out to be in 44 37.14 so with that quarter we're going to round that down to the nearest quarter so that would be 44 37 okay so 4437 would be that potential exit there okay which based off of that calculation would have stopped us out pretty quickly okay and so what was that risk on that well if you go ahead and you take 24 points times 50 that's 1200 so that's a pretty quick loss as you can see with that price moving so again with this strategy requires some practice and one of the drawbacks is when there's a fast move in the opposite direction particularly if prices are breaking down below support that can be a very quick loss now let's go ahead and talk about how this is constructed as far as on the trade and that's utilizing the active trader tab so we're going to active trader and uh you can see uh you know obviously for instructional purposes but probably should have left the uh the example of the of the shorts that i had in overnight um but for illustrate purposes went flat so we can go ahead and talk about fading the gap um all right and uh and you know no one has control over if that level holds uh these weekly pivots have held up in the past uh we're seeing that breakdown probably uh a driver to that uh is with the empire index that came out today was a very poor miss i think they were expecting a number of 29 came in at around 18 and a half um and so uh possibly disappointing the market there may be seeing the hammer coming up here on the five minute but uh i digress let's go ahead and go back and take a look overall with that particular example the difference from that previous close which is around 4461.
and from where the opening price was uh which was at just shy around 44.50 that was approximately about 10 points now what some traders may do is if the gap is much wider uh than a certain number of points you know whether it's 10 points and a low vowel environment if it's a higher vowel maybe it's 15 or 20 if the gap exceeds uh that range you know may look uh to possibly filter out and not do that okay um again we're seeing a more of a rapid move on the downside there so this trade basically failed fast okay now looking at the rest of the setup and there's some orders that were canceled out there as well uh if we go ahead and take a look uh at uh setting this up we're using the active trader platform and what we can do is we can do a under the template there is the trigger with bracket now i've showed you in the past that one can go ahead and customize this and put in a certain number of points you know let's say we'll make it a a wide range there let's say 25 points up or down do apologize that the information is a little truncated with the fonts there your results may look a little better so i'm basically putting a bracket at 25 points on each side and even though this trade is meant to be closed uh on the same day as far as targeting we'll still make this gtc as a bit of a backstop and notice when you go ahead and change those you got a little save icon and from here you click on the save icon this is where you can go ahead and call to set up uh whatever you'd like uh you know whether you know fade gap or you just call it a bracket i'll just uh do fade gap you know plus minus you know for 25 click save and then now uh if you go to the template you can see the drop down with any orders that you've done and i've been a little duplicate here but just to show you how you can do that and then from selecting that you go ahead and you have your template already set up okay and then the idea being is once the market opens if the previous close was higher than where it opens then looking on going long if the price so we can find an example may not be as many cases here but let's just imagine if the price let's say had gapped above the previous close then this would be an example of a short all right and then we can go ahead and do a sell market and then the idea is uh as uh you know on the opening bell some traders may anticipate you know possibly do it right before uh but basically we go long or short in the direction of the previous close okay and then if one does have a wider band for that they can go ahead and possibly place the trade right at the opening and then adjust immediately afterwards so let me do this for illustrate purposes i'm going to do this for instance on the mes and keep in mind uh you know with our example today uh you know that quick loss on one contract that was twelve hundred dollars on the forward slash es if it was on the micro that would have been 120 okay still a loss uh is a loss but understanding what that potential loss is before you do the trade and determining if that is something that's right for you um let's say i'll do an example here uh with uh the micros i'll go ahead and again uh we'll use the same bracket here so i can go ahead and adjust this here so there's fade gap we got 25 points actually it looks like you got a little bit of an error here see if we can fix that we'll go ahead and we'll save it all right so there we go now for some reason i did it again uh but go ahead and have that selected and then let's say if this was the opening right at the moment and we were going long uh now we can also determine our risk too you know that was risking about 120 bucks uh approximately if we wanted to risk 220 bucks you know we can do two contracts keep in mind as far as what your risk is and what you have control over it uh from there you know if this was the open and tick i can go ahead and basically click you know buy this would be a market order uh some traders may try to set on the limit but keep in mind with fast moving markets you may not get a fill and even with fast moving markets could be a poor fill but i'm going to send this so notice that position is open and we got a 25 point bracket around that okay and then what one can do pretty quickly uh since you already have the calculation is one uh calculate where your stop would be based off the opening price and i think for ours it we were looking at uh it was the uh what i'm gonna do is i'm just gonna calculate it just so you can see the numbers uh using this as an example of an opening uh price so let's say if our opening price was at 44 37.25 and we had an atr now keep in mind we're looking at the mes so this atr probably should be closer to about a tenth of the s p so from the previous day uh actually no it's the same that's right it's just a multiplier uh 2443. so i think it had about 44 37 as an example minus 24.43
equals 44 12 57 again rounded to the nearest quarter that would be 44 1250 so with the stop on the chart we had that 25 bracket we're actually pretty close to that because that was a 25 point bracket and then we can go ahead and adjust that to you know 44 12 50. okay likewise we can go ahead and take the other target and go ahead and adjust that to the previous close okay and then in this case uh looks like that was close around this area here it is around 44 61.50 can use this for illustrate purposes and then do that and then once that's done as far as managing the trade let's go and maximize this sorry about that it's one of the issues as far as on the chart there sometimes if you accidentally grab a stop order and it starts sliding on you uh when the verification pops up just hit delete and it'll revert back to that trade okay and then the idea is uh throughout the day whether one or two things are going to happen whether a one hits their desired target b they get stopped out which we had to fail fast this morning or c it may fall somewhere in between so one of the ideas is if this was held throughout the day and neither of these are met uh then this may be somewhat of a profitable trade it may be somewhat of a losing trade one can go ahead and still close this out by going to the active trader tab and there is a flattened button if i click on this flattened button this will go and close out the trade and let's you know for illustrate purposes say this is at the end of the day uh then that would be uh the gain uh for that particular trade and if this was forward slash es we'd be recovering about 400 there so pretty fast moving at the opening there but uh you know at this point as you look on the illustrative example what i like about teaching this strategy helps fulfill a couple of things one it gets you comfortable with utilizing the thinkorswim platform i.e the active trader being able to place a trade with an entry and a bracket okay so it's that repetition of being comfortable with that two uh learning more about a futures contract in this case the s p futures uh since a lot of you probably trade stocks you know understanding how the index works and some of the futures may be helpful third is this example is a little more of a non-discretionary where the risk is defined based off of an atr a technical indicator a target is defined based off of a previous close and really the only discretion that would come in is whether a do you place a trade or not and that may come with some experiences as far as you know where price is maybe it's relative to a a weekly pivot uh maybe the gap is much wider than anticipated and therefore could be more of a runaway gap if price comes outside of a range i use an example of around 10 to 15 points but again your results may verify may uh vary cons keep in mind particularly if it's a relatively smaller move commissions can eat up on that and also one may have multiple small gains but can have a blowout and this could be one example of that may offset some of those gains so some to potentially back test uh as well as just get your confidence in with trading with futures uh the other which is a little more on the discretionary side is on the trade management um as i mentioned you know other ways of looking at this is you know if we have made a move you know that is you know halfway you know to that targeted price uh may look at whether scaling out so in this example you know we could potentially uh you know sell or correction yeah it would be sell since we're currently long could go ahead and sell one contract to basically scale out of it so we're down to one but keep in mind we still have a bracket with two orders so what i can come here is i can right click cancel and replace order change that down to one okay do the same thing with the other order right click on it cancel and replace change that to the existing order that's where the active trader is helpful because you can clearly see what your net position is and you can adjust your stops accordingly all right okay so we went ahead and covered down uh on fade in the gap again a good uh way to just get started on practice and trade in futures and familiarize yourself with the active trader platform it could be a daily exercise uh as well as managing trades uh for a potential profit particularly if you have a half of a move let's round things out uh we'll talk more about fibonacci levels next week but just want to kind of give an idea and this is applicable since we saw the market pull back at the open let's go ahead and bring up the platform we'll start off with the daily chart bring this out and you know as we look at this for more of an intermediate standpoint we can see this swing in the trend from the bounce off in this case 55 day moving average around 50 day moving average uh so we're seeing price pull back below the low of the previous day so kind of a kablood uh which you know can signify a pullback we don't know how much uh fibonacci tool can potentially be helpful depending on what time frame you're looking at on identifying some of those levels so by uh selecting the drawing tools and go into the percentage tool i'm going to click on that and i'm going to go ahead and draw from a low and go up to the high notice i still got that snap bar in there and basically snap it to that high and one of the expectations as far as on pullbacks is that prices may pull back a certain percentage of that previous move so notice as far as with this overall intermediate trend we have a bit of a confluence with this 55-day exponential moving average which happens to be a fibonacci number uh and the 50 and 61.8 retracement so if
there's a significant pullback in this trend an expectation is that prices may hold that area now i'm not saying that this may happen this week uh or you know necessarily next month but that is a potential setup if prices were to pull back if it's a stronger trend prices may have a tendency of bouncing off of one of these higher levels now this is looking over the last eight weeks someone may look at it more near term notice we had a smaller swing back here okay at the beginning of the month up to this one we can go ahead and draw a fib from that as well now for the retracements we draw in the direction of the trend and look for those potential support and resistance areas i'm going to go ahead and remove this previous one just to remove some of the clutter okay and you know we can also use this to by going into the the daily or correction some of the intraday settings may be like an hourly chart if i go back to this five day chart let's do an auto zoom here if i want i can go and switch switch this to an hourly we'll bring that up and when you get into some of these bigger time frames you know sometimes the those pivot points remember is an intraday uh intraday indicator so it gets a little bit crowded when you look at some of the larger time frames but we can still look at it on an hourly so notice that diagonal line is looking at that retracement there and then one may look for some confluence so for instance we did get a bounce off this 23 and a half area there now it did dip below there a little bit of a tweezer bottom but some traders for instance on to fade the gap if they were willing to take a little more risk may create even a little more of a buffer uh as far as that stop if they expect that level to hold i think either way probably would have been squeezed out of this uh and you can look at and notice there's a bit of confluence with going into tomorrow with that level and the weekly pivot so stronger trends would probably expect some of these pivot levels to hold this can also be applied on even a very shorter term intraday period as we look at the descent here of that five minute chart one may go back and look at this overall retracement we can go ahead and go from the high from yester from friday and then take it down to the low notice we're drawing with the trend in this case the downtrend and those you may see a bit of a confluence with some of these fib areas in this case previous day's pivot point in this case on the weekly pivot the third now if this is going to be more of a stronger trend to the downside uh the expectation is some of these levels may potentially hold and we you know so keeping an eye going on here which may be another setup is if price bounces off of this weekly pivot may look at more of the bearish trade all right and uh we don't have enough time to set that up here for today that's one of the limitations of a a session we don't have control over what occurs during this session but we can certainly talk about some of those potential setups and we talked about that last week on a pivot there we'll have a link to that session right here if you want to learn more about those pivot points and we review these uh every week as well in fact let me go ahead and make sure you say full screen again we'll put a link right here or maybe right here because i'm a little dyslexic but it should be appearing uh at the top of the screen there all right all right so with that in mind and notice there is a little bit of a bounce there we'll explore this a little more next week on looking at some of these levels particularly if we're seeing more of a sell-off or not looks like the market is still resilient not too far away from that weekly there springing up after the first half hour but let's see what other things that may impact the market here and we'll let you go for the week i'm going to go to the td ameritrade website we're going to go into research and ideas and we're going to take a look at the calendar and as we look at this we're on economic events we're looking at the 16th there is that empire state manufacturing which came about an hour before the market there now some traders that could have been news to use and possibly you know what maybe not look at the fade again results may vary big miss there as we go in the rest of the week we have earnings this week on a lot of retailers target walmart ross pretty much name any major retailers can have earnings we're also going to have retail sales this week so we're going to get a gauge on retailers tomorrow we're going to engage in introduction industrial production as well as inventories if inventories are going up that could point towards the slow down or if the inventories are really down you know may point towards some of the supply chain issues uh that'll be reported going into wednesday we have fomc minutes we got housing starts and building permits uh lowe's and home depot are also coming out this week wednesday and thursday so uh not as some inflationary stuff but a lot of them pointing more towards the growth side and we'll have unemployment at towards the end of the week friday actually a lighter week there so a few things to keep an eye on there folks as we wrap up today so hopefully you did learn something new today as we went over fade in the gap as an example of a little more non-discretionary and possibly get your feet wet on utilizing the think or swim platform and understanding how those index futures move in this case the s p futures we start talking about fibonacci levels give you a little taste of that and see how that can have a bit of a confluence with some support and resistance levels we're going to break this down even more next week and possibly look at a trade setup and we hopefully set you up with some of the economic news as you start off the week and look at earnings as well as some of the [Music] economic factors that may influence the market okay so folks if you enjoyed what you learned here today make sure you click like i did not see a survey uh come out but that's the way to let me know that you enjoyed the session there's also a place to comment below i'd like to thank mr ken rose for helping out make sure you join him on thursday for his class on trading futures and practice what you learn here today translate that knowledge into wisdom and remember in order to demonstrate the functionality of the platform we did have to use actual symbols keep in mind td ameritrade does not make recommendations or determine suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility so take care folks have a great week we'll see you next week as we'll talk about fibonacci so take care now bye you