TRADING
Take a
look at Figure 5. It shows a symmetrical triangle with a gap during the
breakout; the gap closes during the throwback. Ignoring the gap type, I scanned
my database of the most common and popular chart patterns and found those with
gaps on the breakout, like the one
shown. Then I measured how far prices climbed (upward breakouts) or fell
(downward breakouts) from these chart
patterns. Next, I compared them to the same chart pattern types without gaps.
Which do you think performed better, those showing a gap on
the
breakout day or those without a gap? Figure 6 shows the statistical results.
For bullish chart patterns (the top half of the figure), five patterns showed prices rising farther
when a gap occurred on the breakout day, three performed worse, and three tied.
Bearish
chart patterns (the bottom half of Figure 6) did better with gaps too. All but
three patterns performed better when a gap
appeared on the breakout day than when no gap appeared.
For
bullish patterns, I measured from the breakout price to the highest high before
prices closed 20% lower; for bearish patterns, I measured from the breakout price to the lowest low before prices
closed 20% higher.
If you
look at each row, in some cases there is no difference between gap and no-gap
performance. In many cases, the average rise
or decline I measured is close. For example, descending triangles with
down breakouts (third entry up from the bottom) show prices declining an average of 18% when a gap occurred during the
breakout, versus a 17% average decline for triangles missing a gap. Gaps perform better, but not by much.
To summarize, gaps improve performance, but in many cases the improvement
is meager. In short, don't get too
excited the next time you see a gap appearing during a breakout.
Category: Methods of technical analysis
| 
