High probability 93.33% Day 2 gapup short strategy backed by cold hard data

Welcome to my second blog post.  If you enjoyed reading my last blog, I really believe that you will enjoy this blog even more as this blog lays out a high probability short setup with over 90% accuracy all backed by cold hard number backtested over all the trades from 2019-2021.

In this blog i will attempt to show you the process on how exactly I filter plays to come up with a high probability setup.

Tools used:

Spikeet 

Microsoft excel

1. First step of the process was extracting data using Spikeet  for all stocks that run for more than one day and gapped up on day 2.  

Here are all the filters I used in Spikeet  to find all the multiday runners closing 50% or more the previous day.

If you are not sure how to use Spikeet  I did a whole tutorial on how to use the tool and demostrated a high probablity over extended gapdown setup. You can watch the full video on spikeet's youtube channel.

Now lets pull data from Spikeet and begin generating a high probability criteria for Day 2 short setups.

When I initially pulled the records for all day 2 stocks that gapup with stocks closing over 50% or more the previous day, I got 261 records, out of which 189 stocks closed blow their open the next day.  Now thats a 72% win rate which in inteself is a pretty decent strategy.  But 72% winrate is not something I can really size up on. For me to really take on significant risk, I need a winrate of over 85% so I can be confident that the odds really stack up in my favor.

Now lets add filters and see if we can bring the winrate over 85%.

1.  First filter I added was to ensure the previous day body i.e. the range from open - close on day 1 of the run is more than 70%.

2.  Secondly I also wanted to ensure that the stock closed strong near its highs (close less than 10% from highs) and it did not fade too much. Reason this is important is because if the stock fades too much from the highs on day 1 into close, then it becomes non tradable on day 2 as longs might again become interested in buying the stock for a cheaper price.
3.  And thirdly I want to ensure that the stock performed a decent gapup on day 2 (more than 10%)

Adding all the filters mentioned above I got 30 stocks out of which 28 closed below their open on day 2 i.e. the stocks on day 2 were great all day faders. This is a 93.33% win rate.

Using this information you could now go ahead and fine tune the criterias even more and calculate the average spiking and fading % and other stats on day 2 to find potential entry zones and profit targets.  

Now we do understand that 30 samples in 3 years is quite low, but the goal of this exercise is to have a high probability trade so you could put on a significant risk and really move the needle on your account growth.

Using this mehod you can also come up with some alternate criterias/filters to create more A+ setups each using the same big picture day 2 play but a differnt intraday price action.  Or you could come up with a A- setup and B+ setup and allocate risk appropriately for each setup.  

The goal of using stats is to know when to really size up and put on heavy risk and when to size down.

Here is the summary of the criterias to achieve a 93.33% winrate.

1. Day 1 body i.e. the range from open to close should be greater than 70%

2. The close on the day 1 should be extremely strong i.e. less than 10% away from highs

3.  The gapup % on day 2 should be greater than 10%.

If you have any questions, you can message me on twitter or instagram.

Tools I am affiliated with and use to improve my trading:

Broker: TradeZero

Trading simulation/backtesting charts: TradingSim.  Use code Karan10 for discounts.

Advanced trading indicators: ScriptsToTrade.  Use code Karan10 for discounts.