I decided to look more into opening gaps in SPY (S&P 500) to look for fade the gap strategies. This proves that backtesting is just an indication, you need to test live to get a grasp of the strategy. I have no idea why the numbers are so different. The average gain for long is 0.22% and 0.08% for short. In total there are 89 fills, 21 less than on the EOD test. Today I have downloaded 30 mins data from IQFeed. However, can we trust the data? The test was performed on EOD data from Yahoo! (open, high, low, and close per day). The opening gap strategy above showed promising returns. You won’t find a strategy that lasts year after year. However, markets always change and we have to adjust. Then we’ll find out if there is a discrepancy in the data sets (which I believe it is).Īny thoughts about this strategy? I know this strategy didn’t perform very well some years ago. That’s why I’ll write a second article on this strategy and test it on intraday data from IQFeed. The reason is that some of the high and low quotes are wrong which boosts the numbers. Perhaps too good to be true? Yes, it’s probably too good to be true. The strategy seems very robust and yields very good numbers. SPY opened down about 0.47% and filled the gap all the way up until yesterday’s close. I wrote this article on the 20th of September 2012. I have tested on both data sets with not much difference. The data is adjusted for dividends and collected from Yahoo! and IQFeed. Small winners and occasionally a big loser. The average per fill is a respectable 0.19%. In total there are 110 fills and 98 winners. The tighter I set these criteria, the better average per fill (but obviously less fills). It means fewer fills, but a higher average per fill. The reason I use this is because of SPY’s mean-reversion tendencies. Yesterday’s close must be lower than 0.25 of this formula: (close-low)/(high-low).If the target is not reached exit is at the close. If it opens down -0.5%, the target is 0.375% higher than the fill price. However, if SPY opens more than 1% down it’s a good short, vice versa for long if it opens above 1%. Usually, there is not that much “news” if SPY opens for example -0.4% down compared to for example 1%. The reason I use -0.6% as the maximum is that SPY shows a lot less mean reversion if opening lower. If SPY gaps down lower than -0.15% but higher than -0.6%, go long at the opening print/cross.Over the last two months, I’ve been trading a similar strategy, but not exactly the same as the one I’ve tested here. Today I did my personal twist on this strategy. Opening gap strategy in the S&P 500 (SPY Gap Fill) You can also use statistics to indicate the probability of a gap up or down opening the next day based on statistics. All liquid ETFs and futures contracts indicate where it’s gonna open, of course, it might vary from minute to minute. The activity in the market before the official opening is easy to spot. Some gaps need many many days to fill, some even months, and some never (applies more to single stocks – not indices). We have previously also written about unfilled gap. You can read more about gaps in this article. Most small gaps are filled the very same day, while bigger gaps need more time (days) to get filled. It depends on the size of the gap and time. Exhaustion gapsĮxhaustion gaps happen after an already extended move in one direction.įor example, if the S&P has had a sudden move over several days upwards, we have a potential exhaustion gap if it one day gaps up more than normal (average).Īn exhaustion gap signals the end of the move: it’s the climax. However, it’s easy to explain with hindsight. If it gaps up, we can expect higher prices in the future. This gap usually leads to higher or lower prices in the same direction of the gap. Typically, the gaps are in the range of plus/minus 0.25%. Most of the days this is just noise and hardly worth to write about (in the news). For example, the S&P 500 opens up or down more or less every day. Common gapsĪs the name implies, these are gaps that are “common” and frequent. There are many types of gaps, however, the three most common are runaway gaps (breakaway gaps), exhaustion gaps, and common gaps. Other traders might define gaps more stringent: a gap up is when the opening is higher than yesterday’s high, and a gap down when the opening is lower than yesterday’s low. A gap up indicates the opening is higher than the previous close and vice versa.
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