Analyzing Gaps For Profitable Trading Strategies

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?
What is a gap?
Whatisagap?
Gapup todayslowishigherthan
yesterdayshigh
Gapdown todayshighislowerthan
yesterdayslow
Two gap down days
Twogapdowndays
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
How frequently do gaps occur?

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
How frequently do gaps occur?

1133ofthestockshadatleastonegapup
1135ofthestockshadatleastonegapdown
375 gap up stocks on April 1, 2009
375gapupstocksonApril1,2009
409gapdownstocksonFebruary17,2009
How do we measure performance?

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.
How do we measure performance?

UsedSPYreturnstoadjustformarket
U
d SPY t
t dj t f
k t
movement
1daymarketadjustedreturn the1day
returnforthegappingstockminusthe1day
SPYreturn
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.
Gap up stocks
Gapupstocks
Day0candlecolor
Note:a
valueof
0.041is
0 041%
0.041%.
Gap down stocks
Gapdownstocks
Day0candlecolor
Gap up stocks
Gapupstocks
Day1candlecolor
Gap down stocks
Gapdownstocks
Day1candlecolor
Note:ifyouwereusingashortingstrategythenyouwould
wantnegativereturnsinthistable.
Gap up stocks
Gapupstocks
Gapsize
Note:forthe20daymarketadjustedreturnthereturns
uniformlyincreasewithgapsize.
Gap down stocks
Gapdownstocks
Gapsize
Note:possibleshortingstrategyafterlargegapdown,especiallyonblack
candledays
dl d
Gap up stocks
Gapupstocks
3dayvolume
Gap down stocks
Gapdownstocks
3dayvolume
Gap up stocks
Gapupstocks
30dayvolume
Gap down stocks
Gapdownstocks
30dayvolume
Gap up stocks
Gapupstocks
10daymovingaverage
Gap down stocks
Gapdownstocks
10daymovingaverage
Gap up stocks
Gapupstocks
30daymovingaverage
Gap down stocks
Gapdownstocks
30daymovingaverage
Gap up stocks
Gapupstocks
90daymovingaverage
Gap down stocks
Gapdownstocks
90daymovingaverage
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.
Payingattention
to gaps may not
togapsmaynot
makeyou
rich,butit
probablycan
b bl
improveyour
performance;
mindthegap!
Somerecentexamples
AOL
Somerecentexamples
ZQK
Somerecentexamples
NEE
Somerecentexamples
DIS

Analyzing Gaps For Profitable Trading Strategies

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How frequently do gaps occur?

How frequently do gaps occur?

How do we measure performance?

How do we measure performance?

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