As of 12/20/2024   Indus: 42,840 +498.02 +1.2%     Trans: 15,892 +32.54 +0.2%     Utils: 986 +14.76 +1.5%     Nasdaq: 19,573 +199.83 +1.0%     S&P 500: 5,931 +63.77 +1.1%	YTD  +13.7%   0.0%    +11.9%    +30.4%    +24.3%	Targets    Overview: 12/12/2024     44,200 or 41,750 by 01/01/2025   16,100 or 17,700 by 01/01/2025   1,050 or 975 by 01/01/2025   20,500 or 19,300 by 01/01/2025   6,100 or 5,775 by 01/01/2025
Chart Pattern Indicator: on 12/5/24

As of 12/20/2024   Indus: 42,840 +498.02 +1.2%     Trans: 15,892 +32.54 +0.2%     Utils: 986 +14.76 +1.5%     Nasdaq: 19,573 +199.83 +1.0%     S&P 500: 5,931 +63.77 +1.1%	YTD  +13.7%   0.0%    +11.9%    +30.4%    +24.3%
Targets    Overview: 12/12/2024     44,200 or 41,750 by 01/01/2025   16,100 or 17,700 by 01/01/2025   1,050 or 975 by 01/01/2025   20,500 or 19,300 by 01/01/2025   6,100 or 5,775 by 01/01/2025
Chart Pattern Indicator: on 12/5/24

Bulkowski on the Gap 2H Pattern

I found out about the Gap 2H (or gap2h) pattern from an article in Traders.com (a printed magazine, not the website) and according to the author Paolo Pezzutti, it's based on the work of Michael Harris.

The article says to use a 7% profit target and 7% stop loss, which I tested. He also recommends that the position be sold if the gap is closed. I tested a stop order, as a close below the bottom of the pattern (upward breakout) or above the top of the pattern (for downward breakouts)

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Updated with new performance information on 10/22/24.

Important Results Identification Guidelines Trading Tips Example Performance Statistics Performance and Failure Rates Measure Rule Trading Performance Trading Performance with Pattern Stop Trading Example Target Exit, Stock Performance   Target Exit, ETF Performance   Target Exit, Crypto Performance See Also

Gap 2H

Gap 2H: Important Bull Market Results

Gap 2H: Identification Guidelines

Gap 2H: Trading Tips

Gap 2H: Example

I show two Gap 2Hs on the daily chart.

The first Gap 2H occurs in early January. Price forms a tall white candle after a short-term downtrend and then gaps higher. A day later, price continues the upward momentum and forms a higher high and higher low. After that, the pattern completes and the rise continues.

The second Gap 2H occurs in late January. Again, price gaps upward and then forms a higher high and higher low. This gap also appears in a very short-term downtrend. After the pattern completes, price moves up to a new high before tumbling.

Gap 2H: Performance Statistics

For the following statistics, I used 1,225 stocks, starting from December 1989 to February 2013, but few stocks covered the entire range. All stocks had a minimum price of $5. Since samples were so numerous, I chose every other pattern. There were two bear markets in the 2000s (as determined by the S&P 500 index), from 3/24/2000 to 10/10/2002 and 10/12/2007 to 3/6/2009. Everything outside of those dates represents a bull market.

For each Gap 2H, I found where the trend started and when it ended. To find the trend peak or valley, I found the lowest valley and highest peak within plus or minus 10 days (21 days total) each, before the Gap 2H and the same peak/valley test after the Gap 2H. The closest valley or peak before the Gap 2H is where the trend began. The closest peak or valley after the Gap 2H is where the trend ended.

The 10-bar peak or valley number tends to find major turning points on the daily charts.

I measured performance from the breakout price (the highest high or lowest low in the pattern, depending on the breakout direction) to the nearest trend peak or trend valley after the breakout.

Gap 2H: Performance and Failure Rates

Table 1 lists the failure rates, sorted by market condition and breakout direction along with the average rise or decline after the breakout.

A failure occurs when the stock fails to move more than 5% in the direction of the breakout.

The failure rates may appear high, but that's typical for short-term patterns like the Gap 2H. The highest failures occur after a downward breakout in a bull market 38% fail to drop at least 5%). The average drop is just 8%.

The best performance occurs in a bear market. They have the fewest failures, 28% and 19%. Those also have the highest average rise or drop, 11% and -18%, respectively.

Gap 2H: Measure Rule

Table 2 shows how often the measure rule works. Use the measure rule to find an estimate of how far price is likely to move.

To do this, measure from the highest high to the lowest low in the pattern to get the height. Add the height to the highest high to get the target for an upward breakout.

For downward breakouts, subtract the height from the lowest low in the pattern. Ignore price predictions below 0 and those that represent a large percentage move.

The best performance of the measure rule occurs after a downward breakout in a bear market, with 56% of patterns reaching their target. Those patterns that trade with the trend (upward breakouts in bull markets or downward breakouts in bear markets) reach the target slightly more often than the counter-trend moves.

Gap 2H: Trading Performance

Table 3 shows the performance based on 24,147 trades using $10 commissions per trade ($20 round trip), starting with $10,000 per trade. No adjustments were made for interest, fees, slippage and so on.

The results are sorted by bull or bear market, up or down breakouts. The trades used the same setup as listed in Gap 2H Performance Statistics.

Here's the setup.

• Find a gap 2H
• If price closes above the pattern's high, buy at the open the next day.
• If price closes below the pattern's low, short at the open the next day.
• Sell/cover when price moves 7% in the direction of the breakout.
• If price moves 7% in the direction opposite the breakout, close out the trade for a loss.

For example, in a bull market after an upward breakout from a Gap 2H, the net gain was $56.08 for all trades. The method won 55% of the time and there were 8,887 winning trades. The average gain of winning trades was $703.43.

Forty-five percent, or 7,185 trades were losers. They lost an average of $744.63.

The average hold time was 28 calendar days.

Notice how the gains and losses were pegged near 7%, which is how the test was setup.

Gap 2H: Trading Performance With Pattern Stop

Table 4 shows the results of 24,133 trades, but this time, a penny below the bottom of the Gap 2H pattern (upward breakout) or a penny above the top of the Gap 2H pattern (downward breakout) was used as a stop instead of a 7% stop.

For example, in a bull market after an upward breakout from a Gap 2H, the net gain was $96.01 for all trades. The method won 62% of the time and there were 9,953 winning trades. The average gain of winning trades was $705.38.

Thirty-eight percent, or 6,105 trades were losers. They lost an average of $897.43.

The average hold time was 31 calendar days.

When compared to the 7% stop method, placing a stop below the bottom of the pattern showed that losses increased dramatically, probably because the bottom of the pattern was further than 7% away from the buy price (the reverse for downward breakouts). Net profits increased and net losses also went up. However, the win/loss ratio improved.

Gap 2H: Trading Example

The figure shows a Gap 2H pattern in Apple computer on the daily scale.

The Gap 2H begins at A and ends two days later (the top of it touches the buy line). This Gap 2H breaks out upward as the buy line shows. A close above the buy line is the entry signal. The trade begins at the open the next day, at 650.01.

The target is 7% higher than the buy price, or 695.51.

The stock rises and hits the sell target as shown in the chart.

If the pattern stop method were used, the blue line, which is a penny below the bottom of the Gap 2H, would serve as the stop location. Had the stock dropped far enough to touch the stop price, the trade would have been closed for a loss.

If not using the pattern stop, a loss of 7% would have triggered the exit.

Gap 2H: Target Exit, Stock Performance

Trading using a target exit is simple to explain. Look at the adjacent chart.

I circled the Gap 2H pattern in red. Entry happens when the stock climbs above a buy stop placed a penny above the top of the pattern ($10.50). The target would be twice the height of the Gap 2H added to the top of the pattern. In this case, the stock fails to meet the target.

A stop loss order placed a penny below the bottom of the pattern triggers in this case, closing out the trade for a loss, at $9.54.

For a more detailed explanation of the method I used to test the Gap 2H, see the link.

Testing

As explained in the example above, I used a target exit placed twice as high as the height of the Gap 2H pattern. I placed a stop loss a penny below the bottom of the pattern.

Tables 5 show results for bull markets with upward breakouts and an inbound price trend either up or down. I used 492 stocks in the test.

Table 5. The Gap 2H pattern in stocks and in a downtrend substantially outperform the benchmark (average profit: $154.46 to $83.91). The win-loss ratio is also slightly better at 43%.

The Gap 2H in an uptrend also works well by outperforming the benchmark. The hold times for both up and down trends is about double the benchmark.

Gap 2H: Target Exit, ETF Performance

The associated chart shows an example of how I tested the Gap 2H pattern in exchange traded funds (ETFs).

I circled the Gap 2H. The day after the pattern ends, we have an upward breakout but it's hard to see because the red circle covers it. Entry happens at a price of $110.02, which is the opening price (and it's above the top of the pattern).

A stop loss order placed a penny below the bottom of the Gap 2H helps limit the effects of adverse moves.

Computing the height of the Gap 2H (times two), added to the top of the pattern, gives a target price at which to exit. As you can see, the ETF climbed far enough to reach the sale price of $125.57. The trade closed out at that price.

Testing

This is the same test as the prior one except I used 94 exchange traded funds (ETFs) instead of common stocks.

Table 6. In both trend directions, the Gap 2H beats the performance of the benchmark, but it performs especially well in downtrends. For best performance, only trade the Gap 2H (in ETFs) when price trends downward for several days leading to the start of the Gap 2H, such as that shown in the chart.

Gap 2H: Target Exit, Crypto Performance

Cryptocurrency doesn't usually gap because they trade all day, so I don't have any results to share.

-- Thomas Bulkowski

See Also

• How did I test small patterns in stocks, ETFs, and crypto currency?
• Small pattern performance.
• Updated daily list of short patterns.
• Inverted gap 2H
• Shark-32
• 3DC

Q: How can you tell if a man is aroused? A: He's breathing.