Yesterday I wrote about Three Definitions for Efficiency of a Trend. This morning, a warning: teleportation is very efficient movement.
I’m talking about gaps. Big, honking, overnight gaps.
This is more of a problem for stocks than it ever will be for futures, currencies, or even index-tracking ETFs. If you were to scan stocks for efficiency of movement, no matter how measured, any very large overnight gaps would automatically bee-line that gapping stock to the top of your “efficient mover” list. Think about acquisitions announced at a significant premium to the prior close.
One way to control for gaps might be to compare the simple moving average of daily range to the Average True Range (ATR), since the ATR includes gaps. Too low a ratio of range to ATR means a large gap is probably the cause. The key would be not getting too tight, because some gapping occurs in every stock, and some gaps are good signs (the breakaway gap, reaction to earnings, etc.).
So be careful when scanning for efficiency. Teleportation is very efficient movement.
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