Discussion of article "Gap - a profitable strategy or 50/50?" - page 2
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Iintressan.
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Very good article Vladimir. I am a gap trader, more automated than manual with my own EA, and I have to say:
I agree with you that "after the appearance of the gap, the probability of continuation of the movement and the probability of reversal in many cases is close to 50%" i.e. once the gap appears, imagine at 08:00 on a European index, the probability of entering or exiting the gap is the same.
Now the purpose of the gap is always the same, to cover its gap in the first hours of the market, in fact the probability that a gap in the Dax30, covers in less than 1 day (1 trading session), in the last 3 years, is close to 80%. This does not mean that there is a gap and that it covers immediately. The normal thing is that when there is a gap, the price follows the trend of the gap (e.g.: when there is a bearish gap, the normal thing is that the price falls a little or a lot, in a % with respect to the gap itself), and once the price has fallen, it turns in a different direction and ends up covering its gap.
Therefore, for the hedging to work and to be profitable in the long term, it is necessary to decide very well the entry points to the gap (this is what makes that the risk can be reduced drastically, and we do not support untold losses, I tell you from experience), either below the opening price, or once it has covered a little the gap (very important this value, since a gap can begin to cover, even to reach a % of coverage of 80% and then turn).
Regarding the percentages, in real trading, a percentage >50% is an advantage, but it must be said that there are 3:1 strategies, where losses are very small and profits are large, things that usually come in handy for gaps.
What I see is that the gap, in a certain way, and depending on who interprets it and how you raise it allows us to play with the statistics in our favour, but for this you have to choose very well the entry and exit points of any gap, as well as the fact that a very large gap, neither should nor can be operated in the same way as a very small gap.
I attach a BT of this operation, a Dow 30 (gap hedging model) and a Eurobund with the other strategy (bearish gap = price falls; bullish gap, price rises).