The “Day Gap Trading” strategy is a popular trading strategy that uses gaps to identify trade entries.
What is a Rupture?
A gap in price is, in fact, a zone in which there were practically no transactions after the close of the previous candle. Thus, a gap appears between the close of the previous candle and the beginning of the current candle, and the asset price chart shows a certain gap in the standard price pattern.
Types of spaces
A full upward gap occurs when the opening price is greater than the high price of the previous candle.
A full down gap occurs when the opening price is less than the low of the previous candle.
A partial upward gap occurs when the opening price is higher than the previous close but not higher than the previous high.
A partial upward gap occurs when the opening price is higher than the previous close but not higher than the previous high.
How to trade using intraday gaps?
A trader should open a buy trade when a Full Down Gap occurs and a sell trade when a Full Up Gap occurs.
Initial back test
For backtesting purposes, we coded a full intraday gap trading strategy as a MetaTrader 4 Expert Advisor. Through preliminary analysis, we determined that the best time frame for an intraday gap trading strategy is 1 hour (H1). We retested the intraday gap strategy. For our test, we used a trailing stop of 30 pips as the exit rule, which is triggered after the start of the trade and changes with each new 1 pip of profit. From our point of view, this approach allows you to maximize profits and minimize drawdown.
We tested on 2009.01.01-2020.12.31 using a per-tick simulation on EURUSD-H1 using 1:10 leverage, no reinvestment, assuming a spread of 10 ticks. These are the main performance parameters of the intraday gap trading strategy in its non-optimized state:
ROI 20.65%
Number of transactions 1435
Win rate 37.98%
Max. Drawdown 8.27%
Trade data analysis
After running an initial test of a simple unfiltered strategy, we analyze trading data to identify possible filters to use to make the strategy more profitable while reducing drawdown.
You need to use the following filters (time sessions, weekday cap, trend strength threshold, overbought/oversold conditions, volatility range) to make this strategy profitable if you decide to use this strategy in your investment portfolio.
Optimization
The intraday gap trading strategy can be used with other indicators to filter out losing trades and increase the accuracy of entry signals. After analyzing the trading data, we found the following conclusions, which helped us reduce the drawdown by 4 times:
Trades that were entered at too low and too high ADX values seemed to generate more losses when trading with the “Day Gap Trading” trading strategy during 2009-2020. ADX shows the strength of the current trend. It is wiser to enter into transactions at the beginning of a trend.
(Increased ROI by 2.0% -> 2.4%, reduced drawdown by 8.27% -> 3.82%)
Most of the trades that were entered at a too low Stochastic value, and most of the trades that were opened at a too high Stochastic value, were losing when trading with the trading strategy “Trading Intraday Gap” during 2009-2020. It is risky to make deals in overbought and oversold zones.
(ROI increase by 2.0% -> 2.1%, drawdown reduction by 8.27% -> 5.49%)
Most of the trades that were entered at too high and too low RSI values were unprofitable when trading with the Trading Intraday Gap trading strategy during 2009-2020. RSI measures the magnitude of recent price changes to assess overbought and oversold areas.
(ROI increase 2.0% -> 3.2%, drawdown reduction 8.27% -> 6.18%)
Optimization results
We have analyzed data from testing the intraday gap trading strategy during 2009-2021 and applied some filters such as Stochastic, ADX and RSI. As a result, the profitability of the strategy increased from 2.0% to 2.1%, and its drawdown decreased from 8.27% to 1.94% using 1:10 leverage.
Back test after optimization
Reducing the drawdown by more than 4 times allowed us to increase the leverage that can be used when trading this strategy to 1:40, which in turn led to an increase in ROI on an annualized basis to 72.71%!
The decrease in drawdown also allowed us to use risk-based lot calculation. Below you can see the backtesting results using an opening balance of $10,000 and 10% risk per trade:
ROI 1781%
number of transactions 264
Win rate 45.83%
Max. Drawdown 45.80%
Analyze your trading strategy
If you have a trading strategy that you want to analyze, optimize and increase its profitability (or even turn it from a losing to a profitable Forex trading strategy) - do not hesitate to contact us! Our trade data analysis team will respond to you within 24 hours with all the necessary details.
User Programming
mt4 programming
Our company specializes in the development of automated trading systems and trading indicators for the most popular trading platforms such as MetaTrader 4/5, NinjaTrader 7/8, TradingView, TradeStation and cTrader.
If you need your own automated trading software designed to your individual requirements, request a free consultation with our team of professional programmers and find out the cost and development time of your project.
Disclaimer: Hypothetical or simulated performance results have certain limitations, unlike real performance, simulated results do not reflect actual trading. In addition, because no transactions have taken place, the results may be under or over offset by the impact, if any, of certain market factors such as lack of liquidity.
Simulated trading programs in general also depend on the fact that they are designed with hindsight in mind. No representation is made that any account will, or is likely to, generate profits or losses similar to those shown.
Past results are not necessarily indicative of future results. The customer is responsible for using the product at his own risk and Robobroker is not responsible for any possible damages caused by the use of the product, including but not limited to damages.
