Ji James,



Thank you for asking. This is a rather technical issue that I indeed avoided to detail in the book.
It is however very simple. This "gaps" issue was important in order to calculate the Price/LER divergence. The problem was that a large 10% gap for example on a company earnings would push the divergence indicator to an extreme.

Since I work on minutes data, I take a rolling window of for example 2000 minutes, which allows me to rate the strength of a price ROC and the LER strength. This means that I have a price ROC indexed variable of 2000 values as well as a LER(2000) index variable for LER.

In order to work on the price ROC by eliminating the gaps, I only need to build a new price ROC variable that calculates all the gaps in the last 2000 minutes and subtract the gap level from the Price of the minutes. A new ROC can then easily be calculated.

For example: if in the past 2000 Minutes, there were 5 price gaps of for example +1$, +1.2$, -2$, +0.5$ and -0.3 $, then the total of these gaps is +0.4$. If the actual price at minute 2000 is for example $100 and the price at minute 1 was $90, the ROC is $10/$90. After taking the gaps into consideration, the new ROC will be $9.6/$90. I hence have effectively eliminated the 0.4$ cumulative gaps during that 2000 minutes period. I do that for every minute.



Pascal

PS: By the way, I seldom use the divergence analysis anymore in my daily trading. It is not as good as the Active Boundaries/LER combination or the Supply/LER combination.