11 Mar The Goodness Of Gaps
The Goodness Of Gaps
Mar. 11, 2015
I’ve always been deathly afraid of gaps.
It makes sense. I’m not fond of risk and I’m not fond of uncertainty. That’s why I only watch replays of Federer matches after I know he’s already won. Watch his matches live? Nope. Something bad might happen.
That’s why I’ve stayed away from gaps. Don’t hold positions over the weekend, that’s my motto. Don’t trade penny stocks after the session has closed. Messing with gaps will destroy your trading account!
And then I did the testing. After thousands upon thousands of tests and hundreds of hours of research, I started to notice something very strange. I started to notice that staying away from gaps could cost me a whole lot of money.
For example, I took a chart that I watch every day.
It has a good profit to drawdown ratio and a good winning percentage.
Now take a look at the same Robot if I take Fridays out. I don’t need to tell you that Fridays are the gap day in forex. If you trade currencies on Fridays, you are putting yourself in “danger”, whereas if you do not trade on Fridays, you never have to fear any gaps and life is so much more certain.
Here’s what happened when Friday trading was eliminated.
The profit to drawdown ratio dropped from 25.4 to 17.7, and the winning percentage has dropped from 79.24% to 78.8%. Not to mention that it makes less money overall.
How can that be? How can adding the uncertainty of potentially hazardous gaps actually make you more profitable?
My first answer is: I’m not sure. It doesn’t seem to make sense.
My second answer is: maybe gapping action is not as dangerous as I thought. Maybe trends that start on Fridays don’t have to be tragically reversed just because traders are away from their computers over the weekend.
Maybe chaotic news events don’t really happen as often as my fearful brain thinks they do.
When I started testing what happens when you trade only on Fridays, I expected disaster. Instead I got results like I mentioned. Profit to drawdown ratio came out greater than 10:1 for the Friday-only USDJPY, and the winning percentage is 89.75%. Wait, what? 89% winners? By trading only on Fridays?? Gaps and all??
But here’s the thing that really blew me away. Consider the Largest Winning Trade and the Largest Losing Trade. In my mind, Friday-Only trading might be possible, but the largest losing trade when you put yourself in danger has got to be catastrophic, right?
Not so. The Largest Losing Trade over an 11-year period was $1,089.31. The Largest Winning Trade? $2,513.95.
The largest loser was well within the maximum drawdown number of $2,300 and the biggest winner was twice that! If you planned for the maximum drawdown with your betting, you could handle the biggest loser and reap the benefits of the biggest winner.
What was I so afraid of again?
I understand being afraid of risk. I understand protecting your account. But maybe, just maybe, our fears are unfounded. Maybe, if we want to really juice our returns, we all need to get some gaps in our lives.
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