Adrian Manz’s Gap Trading Strategy for ThinkOrSwim
This is a mean reversion gap trading strategy that is promoted by Dr. Adrian Manz of Trader Insight (see an example video by Manz here: https://www.youtube.com/watch?v=oudRj-Vcv0Q). A client of mine was interested in developing some tools to trade this strategy on ThinkOrSwim, and so I was able to work on this project and get several tools created to make it really easy. After looking into it more, I found the strategy to be pretty intriguing and very different from how I’ve traded gaps in the past, so I thought it might be worth my readers’ time to take a look at it. This is a complete set, which includes the strategy script itself, along with a custom scanner to find the gaps each day, and indicators and columns to help sort and evaluate the gaps.
What It Is
- Scanner: helps you find stocks that are gapping way outside their normal bounds, increasing the probability of an immediate mean reversion move that you can fade.
- Watchlist columns: these help you sort through and quickly analyze the best gap trading strategy candidates that are likely to have an immediate mean reversion.
- Indicator: helps you find past and current entries on the chart and study how individual stocks perform and respond to this kind of gap trading strategy.
- Strategy: Plots entries, exits, and (optionally) stops, on the chart (intraday charts only). The setups are based on the daily chart according to Adrian Manz’s rules, but the actual entries are done on whatever intraday timeframe you prefer to trade. The entry system is my own implementation of the gap trading strategy, which is to enter on the first intraday bar that is outside the standard deviation boundary and also outside of VWAP, and then it takes target once the price retreats back to VWAP. You can use this particular strategy if you like, or manage the trades on your own however you prefer. Adrian Manz uses a more price-action-based entry where he enters on a bar break in the direction of the fade, and takes targets based on support and resistance levels. However, S&R is very hard to code accurately, and I wanted to at least include one mechanical way of implementing the system, so the VWAP target makes sense on a mean reversion strategy like this. And this method seems to work well in my own tests.
Why You Want It
Trading is a game of probability and risk management. This strategy specifically addresses the probability issue, because there is always a reversion to the mean… statistically it’s just going to happen. This strategy helps you find the extreme conditions that are even more likely to result in an immediate mean reversion move.
How It Works
The scanner finds any stocks that meet the trading strategy’s criteria for being likely mean reversion candidates, and then the custom quote watchlist columns help you sort through them quickly and review the charts to see which ones you want to take a position on.
The indicator package helps you visually see previous setups that happened on your charts, as well as today’s signal, by plotting the unique standard deviation lines and signal arrows whenever an entry condition is triggered.