Gap Momentum
Accumulates positive and negative opening gaps to derive a cumulative gap ratio, smoothed by a signal line.
Usage
Used to identify momentum shifts based on price gaps. Buy when the signal line is rising and sell when it is falling.
Background
Perry J. Kaufman introduced Gap Momentum as a way to quantify price gaps relative to their cumulative volatility, similar to an On-Balance Volume (OBV) logic applied to opening gaps. It helps traders identify if gap-driven momentum is increasing or decreasing by comparing the sum of upward gaps against downward gaps over a rolling window. — Perry Kaufman, S&C 2024
Parameters
period(default: 40): Rolling window for gap accumulationsignal_period(default: 20): Smoothing period for the gap ratio
Formula
[ Gap = Open_t - Close_{t-1} ] [ UpGaps = \sum_{i=0}^{Period-1} \max(0, Gap_{t-i}) ] [ DnGaps = \sum_{i=0}^{Period-1} \max(0, -Gap_{t-i}) ] [ GapRatio = \begin{cases} 1 & \text{if } DnGaps = 0 \ 100 \times \frac{UpGaps}{DnGaps} & \text{otherwise} \end{cases} ] [ Signal = SMA(GapRatio, SignalPeriod) ]