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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.

-----Sharpe----
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.

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