This is what happens when you flip the Gap Up/Gap Down strategy!
Updated: May 30, 2020
We know that the best strategies are simple and elegant. And when you come across one that simply relies on the gap up and gap down parameters, you can't help but rush to backtest it. So, here's the Trade set up for the Gap Up/Down strategy -
Buy - Gap Up opening
Sell - Gap Down opening
Short - Gap Down opening
Cover - Gap Up opening
Food for thought - if a stock gaps up , does that mean it will continue going up ?
The answer to that question gets highlighted when we look at the portfolio equity and drawdown curves -
And, almost as reflex, we started to wonder what would happen if we flipped that logic !
So, now, we go long when there's a gap up and short when there's a gap down. On backtesting this with the BANKNIFTY, we see that the Gap Up/Down strategy actually becomes a profit making one -
At the same time, the reversing of this strategy has resulted in a reduced drawdown. It has lessened by 80%, from -64% to -13% -
As always, we applied a percentage-based stop loss profit to better the startegy performance. And that brings up to a strategy with a 94.95% of Net Profit and -6%
Word to the wise - this strategy, though elegant, is as regular as any other. It won't work for all the stocks and requires for you to select a separate universe for it. Because, well,
this is what happened when we backtested the reversed strategy with NIFTY -
Do you want to backtest your trading logic? Or need help with universe selection? Write to us at firstname.lastname@example.org with your query or call/Whatsapp on +91-9321136466