George Soros on China

Posted by kurtosisT

A study of Pivot Straddles and their impact on Gap Fading.

Posted by kurtosisT

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.

KT

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