Tandem Strategies That Work More Often

08/09/2012 4:19 pm EST

Focus: STRATEGIES

Scott Andrews

CEO & Co-Founder, InvestiQuant

By complementing proven gap-trading methods with other strategies that work in range-bound markets, Scott Andrews has gotten more well-rounded and able to trade different market conditions.

We’re talking about trading setups today with Scott Andrews.  Now, Scott, you’ve been known as a gap trader.  You recently moved into range trading.  Why did you do this?  Was the gap trading no longer working out? 

No, not at all.  Gaps have been doing real well, actually.  Last year I had a very profitable year. Actually, one of my better win rates, a 68% win rate, which is very good for my style of trading. But I wanted to take the concept of my approach, which is I identify gap trades based upon historical probabilities—I wanted to apply historical probabilities.  Same concept.  Multiple filters applied to other setups that were lowly correlated. 

So my thought being I only traded the gap 108 times last year, and that left me with 150 days of not having anything to do basically.  So I took my concept and applied it to the first hour range—opening range—to trade breakouts. 

Because what I had noticed is that on days that the gap had mixed probabilities, the low probabilities for actually filling, it was a great day to be range trading going the opposite way.  So I wanted to be able to take advantage of that and keep them lowly correlated, and that’s what I’ve done. 

Why did you focus in on that first hour of trading?

Well, primarily because I wanted to leverage a little bit of my data from the gap, right, because I have exhaustive research on the opening gap, and that gives me insights into what’s going to happen in the morning, and even the whole day, but it’s better at sort of predicting what’s going to happen in the morning. 

So I felt like it was reasonable to technically keep the timeframes close. Plus, quite frankly, I don’t like working after lunch, so I wanted to be able to set up my trades before lunch and not worry about it.

Let’s talk a little bit about that relationship between the gap trading and the range trading.  Do they tend to work better at different times in the market cycle?

It’s interesting.  I don’t have enough data yet, so I’ve been doing the range trade—actually, I started it two years ago, the first hour range.  So I’m still building my database of that.  It appears that when the gap trade is not working as well, that my range trades do work well. 

I don’t know that I’ve had any months where I lost money in the range trade and the gap trade.  If I have, it hasn’t been significant, but I have noticed there are times when the gap trading works extremely well, and sometimes in those months the range trades didn’t work as well.  So it does appear that they’re not very well correlated. 

It’s frustrating when you make money in one and then give back some in the other, but the money I’m losing in the other setup is not as much as I’m making.  So it appears so far that they’re working well in tandem, and they’re a nice two-part step to my portfolio or strategy, if you will.

Are there any particular times, for example, maybe the beginning of the month versus the end of the month, or particular days of the week that you’ve noticed that one works better than another? 

No, I’ve noticed that there tends to be more bullish periods of the month.  So there tends to be directional biases. Like the end of the month is famous, because after options expiration you have generally a lull in the market that goes sideways or down and that lasts a week or so, often as bullish. So you want to be buying down gaps, generally speaking, in the last week of the month. 

At the same token, you want to maybe be doing high breakouts or fades of the low of the first hour.  So I’m directionally long during bullish periods of the month and vice versa.

Well, Scott, thank you so much for sharing this with us today.

You’re welcome.

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