As of 09/29/2023
Indus: 33,508 -158.84 -0.5%
Trans: 14,969 -17.13 -0.1%
Utils: 817 +1.02 +0.1%
Nasdaq: 13,219 +18.04 +0.1%
S&P 500: 4,288 -11.65 -0.3%
|
YTD
+1.1%
+11.8%
-15.6%
+26.3%
+11.7%
|
 34,500 or 33,150 by 10/15/202315,500 or 14,200 by 10/15/2023880 or 800 by 10/15/202313,750 or 12,700 by 10/15/20234,425 or 4,175 by 10/15/2023 |
As of 09/29/2023
Indus: 33,508 -158.84 -0.5%
Trans: 14,969 -17.13 -0.1%
Utils: 817 +1.02 +0.1%
Nasdaq: 13,219 +18.04 +0.1%
S&P 500: 4,288 -11.65 -0.3%
|
YTD
+1.1%
+11.8%
-15.6%
+26.3%
+11.7%
| |
|
34,500 or 33,150 by 10/15/202315,500 or 14,200 by 10/15/2023880 or 800 by 10/15/202313,750 or 12,700 by 10/15/20234,425 or 4,175 by 10/15/2023 | ||
I found out about the Gap2H (or gap 2h) 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. I flipped it upside down and called a new version the inverted Gap2H (or inverted gap 2h). That's what I test here.
Inverted Gap2H
|
| Characteristic | Discussion |
| 3 bars | The pattern is composed of three bars, a gap followed by two lower highs and two lower lows. |
| Down gap | Look for price to gap lower. Yesterday's high price is below the prior days low, forming a gap. |
| Lower high and low | The third bar in the pattern makes a lower high and lower low. (I didn't test this, but the third bar's high is above the 2nd bar's low) |
| Trading Tactic | Explanation |
| Continuation | The pattern acts as a continuation pattern 69% of the time (bull market, down breakout). This high value is probably due to its height. |
| Breakout | A breakout occurs when the stock closes either above the top of the pattern or below the bottom of it. |
| Trade with the trend | Since Inverted Gap2Hs act as continuation patterns most often, expect the breakout to be downward. |
| Wait for breakout | Wait for price to either close above the top or below the bottom of the pattern before taking a position. |
| Measure rule | The Inverted Gap2H fulfills the measure rule 44% of the time (bull market, down breakout). That is, measure the height of the pattern and add it to the high price to get an upward breakout target or subtract the height from the low price to get a downward price target. |
For the following statistics, I used 1,205 stocks, starting from January 1990 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 Inverted Gap2H, 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 inverted gap2H and the same peak/valley test after the inverted gap2H. The closest valley or peak before the inverted gap2H is where the trend began. The closest peak or valley after the inverted gap2H 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.
| 5% Failure | Average Rise/Drop | |
| Bull market, up breakout | 34% | 10% |
| Bull market, down breakout | 39% | -8% |
| Bear market, up breakout | 28% | 11% |
| Bear market, down breakout | 19% | -18% |
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 inverted gap2H. The highest failures occur after a downward breakout in a bull market 39% 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.
| Success | |
| Bull market, up breakout | 57% |
| Bull market, down breakout | 44% |
| Bear market, up breakout | 48% |
| Bear market, down breakout | 50% |
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 an upward breakout in a bull market, with 57% 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.
| Market/Breakout direction | Bull/Up | Bull/Down | Bear/Up | Bear/down |
| Net profit/loss | $65.44 | $(84.45) | $(42.30) | $66.82 |
| Wins | 56% | 43% | 48% | 53% |
| Winning trades | 2,498 | 4,794 | 389 | 1,648 |
| Average gain of winners | $701.05 | $745.70 | $719.79 | $797.70 |
| Losses | 44% | 57% | 52% | 47% |
| Losing trades | 1,953 | 6.397 | 421 | 1,479 |
| Average loss | ($747.55) | ($706.57) | ($746.45) | ($747.59) |
| Average hold time (calendar days) | 29 | 24 | 17 | 11 |
Table 3 shows the performance based on 19,579 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 Inverted Gap2H Performance Statistics.
Here's the setup.
For example, in a bull market after an upward breakout from an inverted gap2H, the net gain was $65.44 for all trades. The method won 56% of the time and there were 2,498 winning trades. The average gain of winning trades was $701.05.
Forty-four percent, or 1,953 trades were losers. They lost an average of $747.55.
The average hold time was 29 days.
Notice that gains and losses hovered around 7%, which is how the test was structured.
| Market/Breakout direction | Bull/Up | Bull/Down | Bear/Up | Bear/down |
| Net profit/loss | $78.67 | $(112.41) | $(71.62) | $61.81 |
| Wins | 60% | 49% | 59% | 69% |
| Winning trades | 2,651 | 5,502 | 477 | 2,159 |
| Average gain of winners | $703.71 | $751.32 | $717.10 | $789.76 |
| Losses | 40% | 51% | 41% | 31% |
| Losing trades | 1,800 | 5,671 | 336 | 975 |
| Average loss | ($841.88) | ($950.40) | ($1,191.33) | ($1,550.12) |
| Average hold time (calendar days) | 30 | 28 | 24 | 19 |
Table 4 shows the results of 19,571 trades, but this time, a penny below the bottom of the inverted gap2H pattern (upward breakout) or a penny above the top of the inverted gap2H pattern (downward breakout) was used as a stop instead of a 7% stop.
The net profit/loss deteriorated in 3 of 4 variations, but the win/loss ratio improved.
I show an example inverted gap2H trade in 3M (MMM) on the daily chart.
The inverted gap2H begins at A and extends two bars later.
An order to short the stock triggers when the stock closes below the bottom of the pattern. Entry occurs at the open the next day, as shown.
Once in the trade, the target is calculated as 7% below the buy price. The approximate price is shown as the target price.
This trade completed successfully (made a profit), just as the stock turned upward.
-- Thomas Bulkowski
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