V.9:6 (255-256): Trading The Deutschemark's Gaps by John Sweeney

V.9:6 (255-256): Trading The Deutschemark's Gaps by John Sweeney
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Trading The Deutschemark's Gaps by John Sweeney

Talk about humiliation! Looking at a Deutschemark chart, I figured I'd trade with the direction of any gap for short small gains. The evidence showed I was 180 degrees wrong! I asked my computer to look at four years of mark prices and trade long if the opening price were above the previous day's range and short if it were below it. Ignoring my usual practice, I asked only what the best and worst move for each intraday trade would be.

As you can see from Figure 1, there is very little difference between favorable (MFE) and unfavorable (MAE) price movement when trading this way. In fact, even if you ask about the price movement after entry for one, two or even 12 days out, there is very little difference. I've never seen such an even distribution, except for that 10th day's probably anomalous adverse excursion.

Out of pure stubbornness, I asked the computer to do the same tallies when the gap was at least 10 points, then 20 and so on up to 50 points. Slowly, something emerged.

The favorable excursion, as seen in Figure 2, never changed perceptibly from that seen when trading with just a one-point gap even as the minimum gap got bigger and bigger. The maximum favorable excursion (MFE) of at least 0.5 (50 trading points) is virtually identical to that when the size of the gap is just one point.

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