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This is a simple advanced rule that detects UP and DOWN breakaway gaps.
A Gap occurs when the security low price of the current bar is higher than the high price of the previous bar (GAP UP) or if the security high price of the current bar is lower than the low price of the previous bar (GAP DOWN). In a bar or candlestick chart, gaps look like a blank space between two bars. A 'GAP UP' can be detected using the following QuantShare formula: GapUP(), or using the following rule: low > ref(high, 1).
There are different types of gaps: Common Gaps, Breakaway Gaps, Continuation Gaps...
The breakaway gap occurs when a security breaks support and resistance levels or breaks out of a trading range. This is generally a strong signal and it indicates that there is a great chance that the security will continue to move in the direction of the break. The signal is bullish if there is an "GAP UP" and bearish for a "GAP DOWN".
I have back-tested the 'GAP UP' rule without using volume filters and got good results for shorter holding period. The shorter the holding period is, the better results I got.
Using a volume filter, I have found that the higher the volume on the GAP day comparing to the average volume of the last X bars, the better the output is. (And of course the less the number of trades is).
NB: Simulations of advanced rules consume much more time than for the traditional rules, especially if some rules, such as the (_belowline), are included.
Several optimizations can be done to the current rule. As an example, the gap ratio, or how far is the high price relative to the last bar low price (GAP DOWN), could be optimized. Currently a ratio of 1.01 is used for the (GAP UP) and 0.99 for the (GAP DOWN).
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
