I have just completed a study of pivot straddles and there impact on gap fading outcomes. I have only looked at the ES and have used 10 years of 1min data. The assumptions made in this study were as follows:
1. Gaps only greater than 2 ticks were analyzed
2. 10 contracts
3. Exit 100% of Gap
4. Stop Loss 20 ticks (5pts)
5. Position closed at end of day if Gap unfilled
6. Commission $2.40 per contract
Case 1- all Gaps using the above assumptions and
Case 2- the 6 assumptions above but excluding gaps with pivot straddle.
What is a pivot straddle you may ask? Simply it is when the daily pivot is between the previous days close and the current days open. I will now post the results and then explain the results.
Case 1 Results
Case 2 Results
The results are that pivot straddles are a risk to gap fading as we saw today were we tested the Pivot twice but failed to transverse it. My study highlights this over a 10 year period that Pivot straddles reduce gap fading profitability by 12 cents for every $1.00 risked. We can see this by the Profit Factor for All Gaps is 1.15 and when we exclude Gaps where there is a Pivot Straddle we see the Profit Factor increase to 1.27 (ie a factor of 0.12). Furthermore, the percentage of profitable trades increases by 5% when we exclude the Gaps with pivot straddles as we would expect it to. It is also worthy to note that both Gaps up and down preformed similar in the study there was no real bias to long or short trades.
Conclusion, give consideration to pivot straddles when gap fading as they do impact the likelihood of a gap filling on the day.
Hope this helps.
Good trading and may all your trades have fat tails and flat distributions.
With 1103.25 the High so far for 2009 if we drop some fibs on the chart from our 1026 swing low to our highs then we can get some idea of levels to watch. Interesting is the mid on this move is 1064.75 which is in close to the 1066.25 unfilled gap magnet. Then on the upside confluence zone to watch:
1. the 23.6 extension on this move 1122.25
2. the mid on the move from 1590.25 to 654 is 1121.50
3. the Yearly R2 at 1120.50 which is not drawn on this chart but refer here.
So I am going to be watching these levels in the coming days and weeks.
Here is a chart that highlights yesterdays move which we are now testing the Monthly R2 and yesterdays close in the doji candle formation could signal some resistance to the US Equity markets. September has seen us rally off the Yearly Pivot and Monthly S1 to where we are now putting the test on Monthly R2.
This is a weekly anchor chart that tells a very important story that the 989 to 1066 zone represents the 50% to 61.8% retracement from Aug 08 to Mar 09 lows. Very important to note that the yearly pivot point is at 1038 on the S&P500 Cash Index which is close to the 61.8% fibonacci retracement and gives a certain degree of confluence give that Pivot Points are generally price magnets!
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