V. 9:6 (257-257): Letters to S&C

LETTERS TO S&C

FILLING THE GAPS

Editor,

In "Trading the Deutschemark's gaps" (STOCKS & COMMODITIES, June 1991), John Sweeney presented an excellent model of explanatory research, going from "what-if?" to price-change and timing guidelines. The reader learned a way to trade gaps and also a way to analyze market action.

After watching many real-time screens, I formed the opinion that markets always try to fill gaps if they can and failure to fill is a very strong signal. If you recall, I used that same principle in projecting prices for your September Mystery Chart contest.

In the currencies, I assume an opening gap will be filled right away unless there is a prior gap. If I'm quick enough to play it, I take the profit near the fill point. On any sign of failure to fill, I have to reverse.

I can hold a winner if the gain is bigger than my stop. It happened this morning, it fact, when the D-mark opened more than 50 points down (to fit the last cash quote in Europe) and then climbed to within 8 points of the previous low.

Entering at the gap-open is tricky. What about breakaways and island reversals? Not quite average gaps to fill. And time left in the contract? The second and third delivery months have many more gaps of all sizes, if one is looking for them. On the day John Sweeney entered (12/20/90), three days into the March spot, several smaller gap days were in place on the June chart: someone going short on the gap-up a day earlier would have enjoyed the three-day drop of 300 points.

In using the trade-against-the-gap tactic, it may be that picking a fresh new gap (including the back-months) and being in a sideways trading range is important. As for risk versus reward, each trader has his own money management constraints; in my case, I can't afford to take 50-point debits while targeting 20-point credits. But for a 50-point potential I would risk 20.

I look forward to more of the ingenious work in the Settlement feature.

WILLIAM J. McBURNEY, JR.

New York, NY