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April 2016 Stocks and Commodities Traders Tips


Trading Gap Reversals

AIQ Version:

Original article by Ken Calhoun
AIQ Code by Richard Denning

Since I mainly work with daily bar strategies, I wanted to test the gap down concept on a daily bar trading system rather than on one minute bars. I set up a system that buys after a stock has gapped down at least 10% in the last two days and then trades above the high of the gap down bar. The entry is then at the close of that bar. For exits I used the built-in exit, the profit protect exit set at 80% once profit reaches 3% or more combined with a stop loss using the low of the gap down bar and also a time exit set to 5 bars. I then ran this system on the NASDAQ 100 list of stocks in the EDS back-tester over the period 12/31/99 to 1/11/2016. The system generated 303 trades with an average profit of 1.09% per trade with a reward to risk ratio of 1.35. Slippage and commissions have not been deducted from these results.

Captions:
Figure 1 – EDS test results for the example system.

EDS Code:
Gap BO Sys1.EDS
(right click and choose Save As)


 

Traders Studio Version :

Original article by Ken Calhoun
Traders Studio Code by Richard Denning

The following code files are contained in the download from the websites:

  • System: GAP_R_SYS – a daily bar system that goes long only on large gap down reversals

Since I mainly work with daily bar strategies, I wanted to test the gap down concept on a daily bar trading system rather than on one minute bars. I set up a system that buys after a stock has gapped down at least 15% in the last 6 days and then trades above the high of the gap down bar. The entry is then next bar at market open. For exits I used a profit protect exit set at 40% once profit reaches 1% or more combined with a stop loss using the low of the gap down bar and also a time exit set to 9 bars. I then ran this system on the NASDAQ 100 list of stocks in the EDS back-tester over the period 12/31/99 to 7/11/14. The system generated 129 trades with an average profit of 1.90% per trade with a profit factor of 1.89. Slippage and commissions have not been deducted from these results. I found these parameters by optimization. I do not believe that there are enough trades to constitute a viable trading system. This pattern could be used in combination with other patterns to allow for enough trades. Also a larger list of stocks such as the Russell 1000 could be tried and then there might be enough trades to use this pattern alone as a trading system.

Figure 1 shows the equity curve and underwater equity curve trading all signals at 200 shares per trade without deducting slippage or commissions.

Captions:
Figure 1 – equity and underwater equity curves for the gap reversal system trading NASDAQ 100 stocks.

Traders Studio Code:
GAPS APR 2016_TSZ.zip
(right click and choose Save As)

 

 

 

 

 

 

 

 

 

 

 

 

 

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