Strategy lab: Buy 2% gap - Sell on 10% gain

This week's strategy is based on the Zignals Stock Alert of buying a 2% gap.


From the historical backtest there was an average maximum closing gain of 10%, so if this was set as a price objective how would such a strategy have performed?


Once again, here are the parameters of the test:

Test period: A complete bull-bear cycle defined by the S&P (March 20th 2000 to October 8th 2007).

I tested on two groups of stocks:

US stocks (Active Trader): AAPL BA C CAT CSCO DIS GM HPQ IBM INTC IP JPM KO MSFT SBUX T WMT

European ADRs: ALU BHP BP SAP DT ASML STM BCS UN TOT ELN AZN DEO RYAAY LUX

Invested: $5,000 per trade

Commission: $9.95

Trades: Round-trip only; partial trades were excluded.

The test bought the closing price of the day of the gap and sold at the closing price of the day a 10% gain was registered. Obviously, individual performance will vary if you buy at time of the gap and sell on a straight 10% gain.

This was one of the most successful strategies of those tested and the first to report a profit when commission was included. It's success was in large part attributed to the relatively low number of available trades (313 to 353 over seven years). The highest profit factor was 1.17 for an 8% stop and 1.13 for a 5% stop.

When commission was excluded the returns increased. European stocks did better using a low % stop, while US stocks offered higher returns when a higher stop was employed. The highest profit factor for US stocks was with a 5% stop at 1.36 and for European stocks with a 3% stop at 1.46:


What of the performance over three random test periods?

The one year periods for the test were August 2003/04 (neutral-bullish bias), June 2002/03 (bullish), and December 2005/06 (neutral-bullish bias). Only US stocks were used for the analysis.


The returns were relatively consistent across protective stop strategies with the range for the win percentage a very respectable 47-53%. The test period included the meandering 2004 and the sharp dip in late 2006 - two areas which could have hurt this strategy but didn't to any great degree. The highest profit factor was 2.23 with a 4% stop, bound by a porift factor of 2.05 and 2.04 at a 5% and 3% stop respectively.

There were 31 to 36 trades a year across the 17 stocks, a very manageable number. This makes it ideally suited for a Zignals stock alert - join today, it's free!



Dr. Declan Fallon, Senior Market Technician, Zignals.com the free stock alerts, market alerts, and stock charts website