Trading Gap Reversals with Gap-Scaled Stops and Targets

Summary

This strategy treats a sufficiently large difference between the prior close and the current open as a gap, then takes a position in the direction of filling it: a downward gap prompts a long, while an upward gap prompts a short. A configurable threshold, expressed as a percentage of the prior close, filters smaller gaps. The entry is set at the opening price, and stop and profit levels are calculated as proportions of the gap size.

The document explains the signal and displays the current entry, stop, and target levels on the chart. It suggests that opening gaps can be interesting, but offers no sample, measured results, or comparison against alternatives. The author cautions that parameter settings need to be adapted to the traded stock. The exit logic checks intrabar highs and lows for target crossings and closing prices for stop crossings; backtest behavior and execution assumptions should therefore be examined before drawing conclusions.

Key ideas

• The signal uses the gap between the prior close and current open, filtered by a minimum percentage threshold.
• A downward gap generates a long signal, while an upward gap generates a short signal.
• The entry is the opening price, with stop and target distances scaled to the gap size.
• The author says parameters require market-specific adjustment and provides no performance evidence.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.