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Closing the gap strategy

Tuesday, October 25, 2016 6:24
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Fading the opening gap is a well-known strategy, promising acceptable results with minimal efforts. A great article about trading gaps is written by Scott Andrews. It sounded interesting, so I’ve decided to spend an hour or so to check if the numbers are right. The basic ‘Dumb gap’ strategy that I’ve simulated always trades the opening gap in the direction of the previous days close. In other words, if opening above yesterdays close, go short. Take profit level is set on yesterdays close, if it is not reached, the strategy  closes the position on the days close.
As a test set I’ve chosen past 10 years of the SPY, ignoring transaction costs and slippage. And the results are:

  • The gaps fully closed on about 75% of occasions
  • The strategy has a sharpe of 1.3
  • Using ‘BLUD’ (below low of an up day) compensation introduces only marginal improvement. These days are quite rare, ~3% of all occurences.
And as a picture speaks a thouthand words, here are the pnl curves.
Disclaimer: this is just an idea that that needs some work before a tradeable stragegy is achieved. I do not recommend anyone trading using the rules described above.


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