Thursday, September 20, 2012

Gap strategy revisited

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.

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

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.

1 comment:

  1. Thanks for sharing your strategy trading on gaps. It is well known that gaps are closed at the end and your strategy built on this fact is working usually.