Gap Reversal LE Strategy

By Samantha Baltodano

TL;DR:

The Gap Reversal Long Entry strategy involves analyzing the size of gaps in stock prices to identify potential reversals. The strategy involves placing simulated buy orders when the price of a stock rises by a certain amount after a gap of a certain size from the previous day's low.

What Is the Gap Reversal LE Strategy?

The Gap Reversal Long Entry (LE) strategy is a gap-based long-entry strategy developed by Ken Calhoun. 

As discussed in his article “Trading Gap Reversals”, the strategy is to be applied to 2-day 1-minute charts for stocks priced between $20 and $70 (to recognize such stocks, use tools like the thinkorswim Stock Hacker).

While trading the gaps is a base for many technical indicators, this strategy is about the proportions of such a gap. 

On certain intraday charts, sufficient gaps might indicate that the stock is currently being overbought or oversold, which might result in a reversal. 

By default, the Gap Reversal LE strategy adds a simulated buy order if the price has risen by 50 cents after a gap of 10% or more from the previous day’s low. Both numbers are customizable based on your specific trading needs.

Since the strategy is long entry only, you might want to use other strategies for exits, e.g., TrailingStopLX.

Summary

• The Gap Reversal Long Entry strategy is a trading strategy for identifying potential reversals in stock prices
• It involves analyzing gaps in 2-day 1-minute charts of stocks priced between $20 and $70
• The strategy involves placing simulated buy orders when the price of a stock rises by 50 cents after a gap of at least 10% from the previous day's low
• The strategy is meant for use in long entry trades and may be used in conjunction with other strategies for exits

Gap Reversal LE is just one of many strategies that Archaide automates. For a full list of strategies and studies available click here.

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