Wednesday, September 19, 2012

SPY opening gaps

There are quite some people in the blogsphere claiming that gap trading is statistically profitable. Just google for 'opening gaps' or something similar to get a bunch of links. Some claims are quite interesting stating >70%  chance of  a gap closing after a 'gap up'. Well, I imagine that it is possible to have a 70% 'closed gap' statistics and still have zero edge in trading the gap. I have looked into this topic about a year ago and first results were promising.
This time I took a look at the matter in a slightly different way: looking for correlation between overnight change of the SPY (previousClose-to-open) and the daily change (open-to-close) of the following trading session.
Below is a chart of cumulative daily percentage changes  of SPY for about 3 years of data. Blue line is the overnight change and green line the day session change. It is immediately clear that day session is more volatile then night session. . Apart from that nothing really special in this  chart.
More insight comes from plotting the overnight return vs daily return :
Judging by eye, there is no relation between nightly change and the daily session. Testing for correlation between the two gives : 0.000062 ... yes, zero.  I'm not sure while my previous attempts at building a gap strategy produced positive results, but now I'm determined to get to the bottom of this...


  1. Hi, I just published a similar test now. Came across yours after I did it.

    1. Cool, I see you're also skeptical about the strategy performance based on yahoo data. Next thing to do is check with intraday data.