Gap Reversion Strategy by TradeAutomation
By TradeAutomation
Performance Metrics
- Author: TradeAutomation
- Symbol: AMEX:XLF
- Timeframe: 1 day
- Net P&L: +3,631,570.44 USD (+363.16%)
- Win Rate: 61.9%
- Profit Factor: 2.123
- Max Drawdown: 701,967.96 USD (21.84%)
- Total Trades: 147
- Sharpe Ratio: 0.168
Description
Today I am releasing to the community an original short-term, high-probability gap trading strategy, backed by a 20 year backtest. This strategy capitalizes on the mean reverting behavior of equity ETFs, which is largely driven by fear in the market. The strategy buys into that fear at a level that has historically mean reverted within ~5 days. Larry Connors has published useful research and variations of strategies based on this behavior that I would recommend any quantitative trader read. What it does:This strategy, for 1 day charts on equity ETFs, looks for an overnight gap down when the RSI is also in/near an oversold position. Then, it places a limit order further below the opening of the gapped-down day. It then exits the position based on a higher RSI level. The limit buy order is cancelled if the price doesn't reach your limit price that day. So, the larger you make the gap and limit %, the less signals you will have. Features:Inputs to allow the adjustment of the limit order %, the gap %, and the RSI entry/exit levels.An option to have the limit order be based on a % of ATR instead of a % of asset price. An optional filter that can turn-off trades when the VIX is unusually high.A built in stop.Built in alerts.Disclaimer: This is not financial advice. Open-source scripts I publish in the community are largely meant to spark ideas that can be used as building blocks for part of a more robust trade management strategy. If you would like to implement a version of any script, I would recommend making significant additions/modifications to the strategy & risk management functions. If you don’t know how to program in Pine, then hire a Pine-coder. We can help!