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Analyzing Gaps For Profitable Trading Strategies

The document discusses analyzing stock price gaps to develop profitable trading strategies. It defines what a gap is, how frequently they occur, and how to measure the performance of gap strategies. The authors analyzed gap up and gap down stocks between 2006-2010 and found certain factors like candle color, gap size, volume, and moving averages can provide useful information. Specifically, larger gap size and a white candle day for gap ups correlated with stronger short-term performance, while gap downs showed less consistent patterns. Paying attention to gaps may help improve trading results.

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183 views

Analyzing Gaps For Profitable Trading Strategies

The document discusses analyzing stock price gaps to develop profitable trading strategies. It defines what a gap is, how frequently they occur, and how to measure the performance of gap strategies. The authors analyzed gap up and gap down stocks between 2006-2010 and found certain factors like candle color, gap size, volume, and moving averages can provide useful information. Specifically, larger gap size and a white candle day for gap ups correlated with stronger short-term performance, while gap downs showed less consistent patterns. Paying attention to gaps may help improve trading results.

Uploaded by

tenglumlow
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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AnalyzingGaps

for
ProfitableTradingStrategies
MTAWebcast
June8,2011
JulieR.Dahlquist,CMT
RichardJ.Bauer,Jr.,CFA,CMT

Dahlquist&BauerMTAWebcastJune8,2011

Overview
Whatisagap?
Howfrequentlydogapsoccur?
q
y g p
Howdowemeasureperformance?
What is the impact of other factors?
Whatistheimpactofotherfactors?
Howcanstudyinggapsimprovetradingperformance?

Dahlquist&BauerMTAWebcastJune8,2011

What is a gap?
Whatisagap?
Gapup todayslowishigherthan
yesterdayshigh
Gapdown todayshighislowerthan
yesterdayslow
Two gap down days
Twogapdowndays

Dahlquist&BauerMTAWebcastJune8,2011

What is a gap?
Whatisagap?
IIncandlestickterminologygapsare
dl ti k t
i l
calledwindowsbecausethey
createanopeningintheprice
p
g
p
movement.
Agapupisarisingwindow.
i
ii
i d
A gap do n is a falling indo
Agapdownisafallingwindow.
Note:agapcouldbeapennyorseveraldollars

Dahlquist&BauerMTAWebcastJune8,2011

How frequently do gaps occur?


Howfrequentlydogapsoccur?
Russell3000stocks(asofJanuary2011)
R
ll 3000 t k (
fJ
2011)
Timeperiod:January1,2006toDecember31,2010
(1259 trading days)
(1259tradingdays)
20,611gapups
17 435
17,435gapdowns
d
Atleast1gapupon91.6%ofthedays
A l
Atleast1gapdownon88%ofthedays
1
d
88% f h d

Dahlquist&BauerMTAWebcastJune8,2011

How frequently do gaps occur?


Howfrequentlydogapsoccur?

1133ofthestockshadatleastonegapup
1135ofthestockshadatleastonegapdown
375 gap up stocks on April 1, 2009
375gapupstocksonApril1,2009
409gapdownstocksonFebruary17,2009

Dahlquist&BauerMTAWebcastJune8,2011

How do we measure performance?


Howdowemeasureperformance?
Day0
D
0 dayofthegap
d
f th
Day1 thedaybeforethegap
Day1 thedayafterthegap
1 day return assumesbuyingattheopenof
1dayreturn
assumes buying at the open of
day1andsellingatthecloseofday1.
3 day return assumesbuyingattheopenof
3dayreturn
assumes buying at the open of
day1andsellingatthecloseofday3.
Dahlquist&BauerMTAWebcastJune8,2011

How do we measure performance?


Howdowemeasureperformance?
UsedSPYreturnstoadjustformarket
U
d SPY t
t dj t f
k t
movement
1daymarketadjustedreturn the1day
returnforthegappingstockminusthe1day
SPYreturn

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Day0candlecolor

Ifastockhasgappedupanditcloseshigher
If
t kh
d
d it l
hi h
thanitopened(awhitecandle),perhapsthe
gapissignalinganuptrend.
i i li
t d
Ifastockhasgappeddownanditcloseslower
thanitopened(ablackcandle),perhapsthe
gapissignalingadowntrend.

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
Day0candlecolor

Note:a
valueof
0.041is
0 041%
0.041%.

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
Day0candlecolor

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
Day1candlecolor

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
Day1candlecolor

Note:ifyouwereusingashortingstrategythenyouwould
wantnegativereturnsinthistable.

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
Gapsize

Note:forthe20daymarketadjustedreturnthereturns
uniformlyincreasewithgapsize.

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
Gapsize

Note:possibleshortingstrategyafterlargegapdown,especiallyonblack
candledays
dl d

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
3dayvolume

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
3dayvolume

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
30dayvolume

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
30dayvolume

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
10daymovingaverage

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
10daymovingaverage

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
30daymovingaverage

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
30daymovingaverage

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap up stocks
Gapupstocks
90daymovingaverage

Dahlquist&BauerMTAWebcastJune8,2011

Whatistheimpactofotherfactors?
Gap down stocks
Gapdownstocks
90daymovingaverage

Dahlquist&BauerMTAWebcastJune8,2011

Howcanstudyinggapsimprovetrading
performance?
f
?
Since gaps reflect a jump in price they probably convey some useful information
Sincegapsreflectajumpinprice,theyprobablyconveysomeusefulinformation.
Ourresearchsuggests:
1.

Gapupstocksthatgaponawhitecandlemaybesignalinganupwardmoveinprice;
however,thereverse(forgapdowns)isnottrue.
h
th
(f
d
)i
tt

2.

IfDay1isablackcandledayandisfollowedbyagapuponawhitecandleday,thenanupward
movemayfollow.However,onceagain,thereverse(forgapdowns)isnottrue.

3.

Forgapupstocks,alargergapsizeismorebullish.Largergapsizeforgapdownstocksis
bearish,butonlyforthefirstfewdays.Gapsizedoesseemtohaveanimpact.

4.

Theimpactofvolumeisunclear,butitdoesseemtohavesomeimpact.

5.

Therelationshiptomovingaveragepriceisunclear,butitalsoseemstohavesomeimpact.

Dahlquist&BauerMTAWebcastJune8,2011

Payingattention
to gaps may not
togapsmaynot
makeyou
rich,butit
probablycan
b bl
improveyour
performance;
mindthegap!

Dahlquist&BauerMTAWebcastJune8,2011

Somerecentexamples
AOL

Dahlquist&BauerMTAWebcastJune8,2011

Somerecentexamples
ZQK

Dahlquist&BauerMTAWebcastJune8,2011

Somerecentexamples
NEE

Dahlquist&BauerMTAWebcastJune8,2011

Somerecentexamples
DIS

Dahlquist&BauerMTAWebcastJune8,2011

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