Gold Gap Strategy

Gold Gap Strategy

The Gold Gap Strategy capitalizes on GLD’s characteristics, requiring specific conditions for entry, including opening above recent highs and substantial gap-ups. By buying on open and exiting on close, this strategy yields promising results, indicating potential value in exploiting gold price gaps for profit.

Gold gaps up and down a lot, much more than stock indices. Based on the size of the gap in gold, we develop a gold gap strategy that can give you further trading ideas.

Previously I have only day traded stocks and traded SPY/ES. Over the last couple of months, I have also looked at GLD, the ETF that tracks the gold price (GLD resembles the price of gold bullion). I’m not a gold bug, instead, I prefer to invest in real estate to hedge for monetary inflation, but GLD has a low correlation with the stock market and that’s what attracts me.

Because gold is a 24-hour market, and GLD only trades on the exchange in regular hours, there are a lot of gaps up and down. Unlike SPY, it has a tendency to not revert to the mean. A mean reversion strategy is less likely to work on gold than on stocks.

First, let’s look at some characteristics of GLD:

  • c2c: accumulated profits from close to the next day’s close
  • c20: accumulated profits from close to next day open
  • o2c: accumulated profits from open to close on the same day (day trade)

The period is from its inception in 2006 until the present. We can clearly see the gain coming from holding overnight, just like you do at night trading in stocks. However, when GLD gaps up significantly and also opens above the high of the last several days, it tends to rise even more during the day towards the close.

Over the whole period, GLD has, on average, gapped up/down 0.64% (ignoring whether it’s up or down). This is quite a lot and more than double the average gap compared to SPY.

Here is a potential gold gap strategy:

Based on the above, we try to construct a gold gap strategy:

  • GLD must open above the high of the last five days.
  • GLD must gap up at least 1.5 times the 25-day average of the opening gap.
  • Buy on open, exit on close.

A very simple strategy which gives this result:

P/L in %#fills#winsAvg

The average winner is 0.58%, and the average loser is -0.45%. There are 20 winners above 1% and just 10 losers worse than -1%.

The average gain from open to close over this period is 0.01%, so this is a lot better.

Here is the profit curve:

GLD has a bigger chance of gapping yet again the next day. On average, GLD has gapped up 0.07% over the whole period. The next day GLD has gapped up on average 0.12%, a lot more than average.

The P/L improves if we hold GLD longer, but in my opinion, with a lot more at risk. Perhaps holding until the next days open is worth it, it boils down to the risk appetite of the trader. In this case, the average gain is 0.29% per trade.

If we turn it upside down and go short, we get this profit curve:

This has been a bull market, so clearly, there is something valuable in this strategy/setup (?).

The above was just an example, but we are confident you can develop many interesting setups by looking at gaps in gold.

What is GLD, and how does it relate to the gold market?

GLD is an exchange-traded fund that tracks the price of gold bullion. It gives investors an accessible way to gain exposure to the gold market, with the added benefit of having a low correlation with the stock market.

How does GLD differ from traditional gold trading?

GLD is an exchange-traded fund that tracks the price of gold bullion, offering investors a convenient way to access the gold market. Unlike traditional gold trading, GLD trades like a stock during regular market hours, providing liquidity and ease of trading. Thus, the price of GLD might deviate from the gold price.

Why are gold price gaps significant, and how do they impact trading strategies?

Gold’s 24-hour trading cycle leads to frequent and substantial price gaps for GLD. These gaps can affect trading strategies by influencing entry and exit points, particularly for mean reversion strategies, which may be less effective due to gold’s tendency not to revert to the mean as readily as stocks.

What role do past price movements play in the proposed gold gap strategy?

The gold gap strategy involves identifying specific criteria, such as GLD opening above the high of the last five days and gapping up at least 1.5 times the 25-day average of the opening gap. By considering past price movements and gap patterns, traders can establish rules for entering and exiting trades based on historical data.

How does holding GLD overnight impact trading performance compared to day trading?

Analysis shows that holding GLD overnight has historically been more profitable than day trading it. Accumulated profits from close to the next day’s close suggest that overnight holding tends to yield higher gains. This insight can inform traders’ decisions regarding the duration of their positions.

What are the potential risks and rewards of holding positions in GLD overnight?

While holding GLD overnight may offer higher average gains per trade, it also carries additional risks, particularly market fluctuations that occur outside regular trading hours. Adverse market movement when markets are closed happens often. Traders must consider their risk appetite and market conditions when deciding whether to hold positions overnight or exit intraday.

Why is gold known for having substantial price gaps, and how does it affect trading strategies?

Gold’s 24-hour trading cycle leads to more pronounced price gaps for GLD because GLD is open only 6.5 hours per day. These gaps can significantly impact trading strategies, especially mean reversion strategies, which tend to be less effective in gold compared to stocks.

What are the key characteristics of GLD, and how do they influence trading decisions?

Characteristics such as the accumulated profits from close to the next day’s close, open to close profits on the same day (day trading), and accumulated profits from close to the next day’s open help traders identify potential opportunities in GLD.

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