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Gap strategy revisited

Tuesday, October 25, 2016 6:24
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(Before It's News)

In the beginning of 2011 I've backtested a fade gap strategy. There seemed to be an edge to fading gaps, so let's take a look how this strategy performed since then. Once again strategy rules:
  • Trade only gaps larger than 0.1 %
  • Enter on the open (short for Up gap and long for Down gap). Profit target is set at previous day close.
  • If profit target was not reached during the day, exit on close

This time I corrected the data for dividends.

B4INREMOTE-aHR0cDovLzEuYnAuYmxvZ3Nwb3QuY29tLy16Tm9yRkp1V2dQRS9VRnVJel9fR1duSS9BQUFBQUFBQURaVS91c0lrdVo2TXJCWS9zMzIwL2ZhZGVHYXBzU3RyYXQucG5n

The results out-of-sample are pretty good, the strategy was doing well in 2011-2012.
A more realistic case is including transaction cost of about 0.03% , which is approximately 3ct for SPY. 1ct is IB commission, another two are needed for crossing the bid-ask spread.

B4INREMOTE-aHR0cDovLzQuYnAuYmxvZ3Nwb3QuY29tLy1IUkplOFd2Sno0OC9VRnVIWXc0cU5XSS9BQUFBQUFBQURaTS96dWUtYk5OcHJjcy9zMzIwL2ZhZGVHYXBzU3RyYXRfZnJpY3Rpb24ucG5n

The Sharpe ratio for these strategies is still not solid enough for me to actually put my money on it.

—–Sharpe—-
buyAndHold      0.189366
fadeUpGaps      0.508378
fadeDownGaps    0.595578
fadeAllGaps     0.783124

… and I still keep wondering, how can there be an edge while there seems to be no significant correlation between the night gap and the day session change.

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