Most of our research shows that trend following is the ideal strategy for intraday trading (as opposed to mean reversion) and that gaps can signify imbalances in supply and demand.
In this Post, we present an incredibly simple system for trading intraday gaps.
This is a simple trend-following strategy for the 1-hour chart where we will go long after a gap up and exit after a gap down.
A gap up is defined as a 1-hour bar where the low is higher than the previous bar high and a gap down is a 1-hour bar where the high is lower than the previous bar low.
We will also have a stop loss of 0.5% where the execution is delayed until the close of the next bar. In other words, if the stop loss level is met, the exit is not executed immediately but at the next bar close.
The inclusion of the stop loss allows us to cut losses short and let winners run. The ‘delay’ means that we do not sell our position too quickly on a reaction (this could result in a poor price fill) but we give the market a chance to settle and hopefully reverse.
- Buy = IF Gap UP, buy on Close
- Sell = IF Gap DOWN, sell on Close
- Stop Loss = 0.5% (exit on next bar close if stop loss level hit)