Interesting Gap momentum indicator, but not very versatile (across assets or market regimes). Sharing in case its helpful to others, or if it inspires some creative ways to use it.
Strategy
This is my slightly modified version of Perry Kaufman’s Gap Momentum strategy, as featured in TASC magazine (Jan’24). It’s based on his GAPM indicator. Thanks to TheFinancialHacker for the inspiration.
The Gap Momentum (GAPM) Indicator
Tracks positive and negative gaps at the daily open (compared to previous close)
Measures the ratio of cumulative upward price gaps to downward price gaps over a specified period.
Kaufman calls this cumulative “gap ratio” the “Gap momentum”
Observations
GAPM has some predictive power in more reactive markets
Performs better in an uptrend
Seems well suited for QQQ’s volatility
Not to be used as a standalone signal
Not expected to beat buy and hold (it doesn’t)
Strategy logic:
Long Entry
Moving Average of the Gap Ratio is rising
Long Exit
Moving Average of the Gap Ratio is falling
My Modifications:
Took EMA of Gap ratio instead of SMA
Added a simple EMA trend filter
Backtest
Asset: QQQ
Starting Equity: $100,000
Allocation per trade: 100%
Start Date: Jan 1 2011
End Date: Dec 31 2023
Performance
It rode the QQQ wave fairly easily from 2011–2023, albeit with a bad start in 2011. The trend filter avoided a bad dip in 2022.
Note: It’s not meant to beat buy and hold, it’s a predictive signal that should be combined with others, used as part of a system.
Code & Interactive Backtest
Built in Python using Quantconnect (LEAN).
Code: From the backtest, click the ‘code’ tab to view the python code.
TASC has also published code in other languages.
Reference
What’s next:
Wasnt planning to do much more on this, but I’m open to ideas.
How would you modify it?
What other indicators would you pair it with?
What gapping assets would you try it with?
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