Market Profile Statistics: Gap Open & Travel Value Area – Backtested with Nifty Futures
It has been a long time to post any statistical backtest results & thought that it would be a good time to write a post on Market Profile Statistics: Gap Open & Travel Value Area. The backtest resembles almost to the Market Profile 80 Percent Rule but we do not keep the criteria of minimum two 30 min bracket open or close within the range or value area.here. The results of the backtest confirm the statement made by Jim Dalton back in 2016 that 80 Percent rule no longer works as intended due to a dramatic shift in the behaviour of market participants. If we add the criteria of the 30 minute close inside Value area for two consecutive brackets, it would turn out that only 20% of times market travels entire value area instead of 80% of the time which used to happen when Jim initially introduced the 80% rule. It is always best to keep on running tests on a regular interval on a system where rules are defined as it may show different results as per the changing market conditions. Anyway, I am no one to decide what method one follows and can only wish luck to traders who make profits 99% of the time following the 80% rule. Now, let us check the results of the backtest with various point Gap opens.
I never guess. It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts. – Sir Arthur Conan Doyle
I never guess. It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts. – Sir Arthur Conan Doyle
Gap Open & Travel Value Area – Where market has gapped at least by 1 tick ( 0.05 points ) in Nifty Futures
Gap of Minimum 1 Tick
As per the above chart, let us find out that in the past 1500 days when did Nifty futures gapped up/down by at least 1 tick (0.05 points) & how many days did it travel the entire value area.
- Gap Open above previous day range – 356 days ( 23.7%)
- Moved inside previous day’s range – 342 days (68.0%)
- Moved to previous day Value Area High – 181 days (74.8%)
- Moved to previous day Value Area Low – 75 days (31.0%)
- Gap Open below previous day range – 198 days ( 13.2%)
- Moved inside previous day’s range – 126 days (63.6%)
- Moved to previous day Value Area Low – 94 days (74.6%)
- Moved to previous day Value Area High – 34 days (27.0%)
Gap Open & Travel Value Area – Where market has gapped at least by 5 points in Nifty Futures
Gap of Minimum 5 points
As per the above chart, let us find out that in the past 1500 days when did Nifty futures gapped up/down by at least 5 points & how many days did it travel the entire value area.
- Gap Open above previous day range – 288 days (19.2%)
- Moved inside previous day’s range – 181 days (62.8%)
- Moved to previous day Value Area High – 134 days (74.0%)
- Moved to previous day Value Area Low – 57 days (31.5%)
- Gap Open below previous day range – 159 days ( 10.6%)
- Moved inside previous day’s range – 91 days (57.2%)
- Moved to previous day Value Area Low – 66 days (72.5%)
- Moved to previous day Value Area High – 21 days (23.1%)
Gap Open & Travel Value Area – Where market has gapped at least by 10 points in Nifty Futures
Gap of Minimum 10 points
As per the above chart, let us find out that in the past 1500 days when did Nifty futures gapped up/down by at least 10 points & how many days did it travel the entire value area.
- Gap Open above previous day range – 233 days (15.5%)
- Moved inside previous day’s range – 132 days (56.7%)
- Moved to previous day Value Area High – 100 days (75.8%)
- Moved to previous day Value Area Low – 44 days (33.3%)
- Gap Open below previous day range – 129 days (8.6%)
- Moved inside previous day’s range – 69 days (53.5%)
- Moved to previous day Value Area Low – 49 days (71.0%)
- Moved to previous day Value Area High – 13 days (18.8%)
Gap Open & Travel Value Area – Where market has gapped at least by 20 points in Nifty Futures
Gap of Minimum 20 points
As per the above chart, let us find out that in the past 1500 days when did Nifty futures gapped up/down by at least 20 points & how many days did it travel the entire value area.
- Gap Open above previous day range – 149 days (9.9%)
- Moved inside previous day’s range – 68 days (45.6%)
- Moved to previous day Value Area High – 51 days (75.0%)
- Moved to previous day Value Area Low – 28 days (41.2%)
- Gap Open below previous day range – 89 days (5.9%)
- Moved inside previous day’s range – 41 days (46.1%)
- Moved to previous day Value Area Low – 31days (75.6%)
- Moved to previous day Value Area High – 11 days (26.8%)
Gap Open & Travel Value Area – Where market has gapped at least by 50 points in Nifty Futures
Gap of Minimum 50 points
As per the above chart, let us find out that in the past 1500 days when did Nifty futures gapped up/down by at least 50 points & how many days did it travel the entire value area.
- Gap Open above previous day range – 44 days (2.9%)
- Moved inside previous day’s range – 15 days (34.1%)
- Moved to previous day Value Area High – 11 days (73.3%)
- Moved to previous day Value Area Low – 7 days (46.7%)
- Gap Open below previous day range – 29 days (1.9%)
- Moved inside previous day’s range – 13 days (44.8%)
- Moved to previous day Value Area Low – 11 days (84.6%)
- Moved to previous day Value Area High – 5 days (38.5%)
From the above results, we can safely conclude many important aspects of Market Profile.
- Probability of the gap not getting filled rises if the gap is considerably higher
- Probability of the auction travelling back inside the previous day range is almost 1 standard deviation if the gap is negligible
- Probability of the auction travelling to VAH from above & VAL from below is >70% on an average once it enters previous day range
- Probability of the auction travelling to VAL from above & VAH from below is <32% on an average once it enters previous day range
To conclude, the backtest might have a margin of error due to a next expiry contract opening away from where the previous contract closed but even taking that error into consideration, there is a negligible probability of the auction travelling through the entire value area. Most of the times, smart money lays a trap exactly where everyone is confident & trading for a pre-defined target & when we define targets of previous day value areas, higher probability of the target not getting hit.
Happy trading
Disclaimer :
The above charts are for educational & reference purpose only. Trading in derivatives has high risk involved and not suitable for all investors. The above levels are not a recommendation/offer to buy or sell any or all derivatives. Any person trading or making buying or selling decisions on the basis of the above charts should do so at their own risk. Justfintech.com / its affiliates / staff will not be responsible for any profits and/or losses arising from the trades executed on the basis of the above excerpts. It is advisable to consult your personal financial adviser/consultant before entering into a trade. The usage of the article is subject to Terms of Use, Risk Disclosure / Disclaimer and Privacy Policy of Justfintech.com
Nice elaboration