He did like 12 different tests on the gaps and came up with this in summary.... it was a 21 page report. (copied and pasted)
GapsTest(12)
Our final test in this report is going to apply the third set of circumstances we applied above to the GapsTest(9) scenario. In short, we are going to trade in the SAME direction of the gap and the previous dayâs close only if the gap is opposite of the trend.
If market gapped higher and the 20-day moving average is lower than 5 days ago, and day â1âs close is higher than day-2âs close, then we buy.
If market gapped lower and the 20-day moving average is higher than 5 days ago, and day â1âs close is lower than day â2âs close, then we sell.
System Name: GapsTest(12)
Data Type: Daily
Source: System Navigator
Developer:
Report Filters: Trade types: All trades, From date: 1/12/96, To date: 9/28/01
OVERALL
Total Net Profit: $96,363 Profit factor ($wins/$losses): 1.67
Total Trades: 162 Winning Percentage: 55.6%
Average trade: $594.83 Payout ratio (avg win/loss): 1.33
Avg # of bars in trade: N/A Kelly ratio: 0.2224
Avg # of trades per year: 32.4 Percent in the market: N/A
WINNING TRADES LOSING TRADES
Total Winners: 90 Total Losers: 72
Gross Profit: $240,750 Gross Loss: -$144,388
Average Win: $2,675.00 Average Loss: -$2,005.38
Largest Win: $17,000.00 Largest Loss: -$9,175.00
Largest Drawdown in Win: -$3,675.00 Largest Peak in Loss: $5,500.00
Avg Drawdown in Win: -$1,046.81 Avg Peak in Loss: $1,105.73
Most Consec Wins: 7 Most Consec Losses: 5
Avg # of Consec Wins: 2.31 Avg # of Consec Losses: 1.80
Avg # of bars in wins: .00 Avg # of bars in losses: .00
MONEY MANAGEMENT
Max. closed-out drawdown: -$13,375.00 Max. intraday drawdown: -$14,950.00
Account size required: $14,950 Return Pct: 644.6%
If we were to compare these results with the raw results of GapsTest(9), you would see that we dropped 23 winning trades and 23 losing trades while increasing the average trade win or lose $50.00. The most obvious difference was the drawdown which dropped over $10,000. Further, the largest losing trade made up 67% of the current largest drawdown. As a result, stops should help the overall statistics quite a bit:
GapsTest(12) With $1,500 Stops
System Name: GapsTest(12)
Data Type: Daily
Source: System Navigator
Developer:
Report Filters: Trade types: All trades, From date: 1/12/96, To date: 9/28/01
OVERALL
Total Net Profit: $102,025 Profit factor ($wins/$losses): 1.83
Total Trades: 162 Winning Percentage: 42.6%
Average trade: $629.78 Payout ratio (avg win/loss): 2.46
Avg # of bars in trade: N/A Kelly ratio: 0.1927
Avg # of trades per year: 32.4 Percent in the market: N/A
WINNING TRADES LOSING TRADES
Total Winners: 69 Total Losers: 93
Gross Profit: $225,550 Gross Loss: -$123,525
Average Win: $3,268.84 Average Loss: -$1,328.23
Largest Win: $17,000.00 Largest Loss: -$1,512.50
Largest Drawdown in Win: -$1,475.00 Largest Peak in Loss: $5,275.00
Avg Drawdown in Win: -$593.66 Avg Peak in Loss: $207.39
Most Consec Wins: 6 Most Consec Losses: 7
Avg # of Consec Wins: 1.77 Avg # of Consec Losses: 2.33
Avg # of bars in wins: .00 Avg # of bars in losses: .00
MONEY MANAGEMENT
Max. closed-out drawdown: -$10,900.00 Max. intraday drawdown: -$11,775.00
Account size required: $11,775 Return Pct: 866.5%
InformedTrader.net Analysis on GapsTest(12) W/Stops:
Using the same logic to determine where the best place to put stops would be, the most noticeable difference was the drop in the winning percentage. The drawdown was brought down slightly, but considering we dropped at $9,000 losing trade, the degree the drawdown dropped was not impressive. Given the choice, based on the two sets of results, using the GapsTest(9) logic without the extra filter of looking at the direction of the previous close is the more reliable route to go. Further, additional filters other than the direction of the previous close is certainly worth looking into.
Gaps Report Summary
Based on the results you see in the various tests we performed, there may be some profitable ways to consistently trade gaps. However, the conventional logic is definitely not the way to go. Our best overall results came on GapsTest(9) using reasonable stops when trading in the direction of the gap but in the opposite direction of the trend. When the market has been trending in one direction and then gaps in the opposite direction, it looks as if gaps can be a good counter-trend method to consider.
End Note
Whereas InformedTrader.net tries to give a broad picture of several different approaches in this report, there is no way it can be considered exhaustive. However, we are currently putting together a much more exhaustive and thorough analysis (book) on different ways to approach gaps in both the S&P and Bond markets. So far, we have over 60 different tests that have been performed with full results. This exhaustive gaps analysis also looks at several of the additional âcircumstancesâ WITHOUT the gaps to show whether the value is in the actual market gapping open or whether the value is in the other circumstances that were combined with the gaps. Very, very interesting results with some pretty valuable trading ideas were uncovered.
The Trading Gaps Analysis will be FREE to all subscribers of
www.InformedTrader.net and is due out on March 15th. Our next System of the Month Report will be online at our website on March 4th. Marchâs System of the Month Report is a look at a unique short term swing trading method applied to daily commodity markets and individual stocks. You wonât want to miss next monthâs report!
Finally, if you have any suggestions/ideas regarding this report or trading gaps, please feel free to let us know by emailing us at
new@informedtrader.net.
I have been accused of being a system vendor from the start. I have recommended realitytrader.com, Powertradesignals.com, informedtrader.net/home.asp and had a negative opinion on millenium-traders. I must work for all three of the positive comment ones. I got worked in the markets and have been trying to find backtested, proven results from systems, but everybody says they are bad. I thought all a system was was a proven edge in the market. Everyone worships guys like candle because he is supposedly making $250,000 or something a year. (A guy making that kind of money shouldn't be wasting his time policing the boards imo)- so when he blasts me and others as system vendors-I don't get the answers to my questions, because all the noobs like me are afraid of having people like him mad at them.