This is the 2 standard deviation mean reversion gaps strategy, also known as the “Baltimore Chop” 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 and read more about trading it here). 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.
- Watchlist columns: these help you sort through and quickly analyze the best gapping stock candidates for 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 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.
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.