I backtested ICT, here's what I found

AI Summary

Author backtests an ICT fair value gap strategy across SPY, QQQ, AAPL, ABNB and KO, finds mediocre risk-adjusted returns, and concludes buy-and-hold SPY is preferable.

SPY — LONG The author backtested an ICT fair value gap strategy on SPY from 2006-2025 and found a 6.52% CAGR, 39.67% max drawdown and Sharpe ratio of 0.28, calling the risk-adjusted returns mediocre. He concludes the pattern is not tradeable as a standalone strategy and that an investor would be better off simply holding SPY. The implied mechanism is that buy-and-hold SPY avoids the strategy's large drawdowns and poor risk-adjusted return profile. Horizon is the 2006-2025 backtest period, with no forward horizon specified.

You'd be better off just holding SPY.

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Hey guys, so I was watching some content about inner circle trading and smart money concepts, I found this gap patterns being shown a few videos. It is really an interesting one

https://preview.redd.it/n7olmssexifg1.png?width=762&format=png&auto=webp&s=8b8a5e7e6e3947989350843309bbff4333fcc245

In the above screenshot, the candle 1's high < candle 3's low, while candle 2's body in between them, which creates a gap. I you notice the next candles, they move up to cover the gap it created in the previous sessions and moving on.

**few more examples -**

https://preview.redd.it/ujuck7d0yifg1.png?width=557&format=png&auto=webp&s=c0b6e5d1ee17c275ed43a8ca7d24276be4c55830

https://preview.redd.it/n28qnjh8yifg1.png?width=382&format=png&auto=webp&s=a4cef3455d20c02547f1342393ede059da5f556f

I don't want to post more of it lol, but I hope you get the concept.

The more I look for them, the more I find them, they always snap back and close the gap. So I decided to backtest them.

I wanted to keep the setup very simple to avoid over fitting

**Entry**

1. Previous 3rd candle's L > previous 1st candle's H **AND**
2. Previous 2nd candle's L< previous 3rd candle's H **AND**
3. Previous 2nd candle's H > previous 1st candle's H (**the first 2 point defines the gap**) **AND**
4. Current **O** < Previous 3rd candle's L (**we must be below the gap to trade the gap**)

**Exit**

1. Close >= Previous 3rd candle's low, this is previous 3rd candle from the entry point **OR**
2. Close < Buy price - (atr 14 during entry \* 5), I made it to be 5 because it needs some room to move down and come back up.

**Backtest settings -**

1. Backtest period - 2006 Jan -  2025 Dec
2. Initial amount - 100,000
3. Ticker - SPY
4. Timeframe - daily
5. Allocation per trade - 100%

**Core Returns**

* Total Return: 250.87%
* CAGR: 6.52%
* Profit Factor: 1.63
* Win Rate: 85.44% *(176 Wins / 30 Losses)*

**Risk Metrics**

* Max Drawdown: 39.67%
* Calmar Ratio: 0.16
* Sharpe Ratio: 0.28
* Sortino Ratio: 0.40
* Avg Profit: $3,680.77
* Avg Loss: -$13,231.60

**Position & Efficiency**

* Time Invested: 47.70%
* Avg Positions Held: 0.45
* Avg Hold Time: 16.1 days
* Longest Trade: 258.0 days
* Shortest Trade: 1.0 day

**Execution & Friction**

* Total Trades: 206
* Total Costs (Fees/Slippage): $7,509.61
* Initial Capital: $100,000
* Final Capital: $350,866.96

https://preview.redd.it/kqlra5kq2jfg1.png?width=1706&format=png&auto=webp&s=95683a01f42cbbb850f7d75732b58fa303f51a26

https://preview.redd.it/frx7w4qu2jfg1.png?width=1752&format=png&auto=webp&s=52a8cfc54fbf44c1c6643d093ec18846caf6147c

85.44% of win rate is very impressive. Drawdown is on the higher side - \~40%.

I wanted to try this on multiple tickers -

**QQQ**

* **Core Returns**
   * Total Return: **395.14%**
   * CAGR: **11.73%**
   * Profit Factor: **1.80**
   * Win Rate: **86.59%** (142 wins / 22 losses)
* **Risk Metrics**
   * Max Drawdown: **22.41%**
   * Sharpe Ratio: **0.43**
   * Sortino Ratio: **0.65**
   * Calmar Ratio: **0.52**
   * Avg Profit: **$6,278.27**
   * Avg Loss: **–$22,562.49**
* **Position & Efficiency**
   * Time Invested: **32.19%**
   * Avg Positions Held: **0.30**
   * Avg Hold Time: **13.4 days**
   * Longest Trade: **93.0 days**
   * Shortest Trade: **1.0 day**
* **Execution & Friction**
   * Total Trades: **164**
   * Total Costs (Fees/Slippage): **$7,731.81**
   * Initial Capital: **$100,000**
   * Final Capital: **$495,139.49**

https://preview.redd.it/k5mxx8qt3jfg1.png?width=1743&format=png&auto=webp&s=824b2a61ca160550c53c0a2a43cc2c4242613f99

https://preview.redd.it/ibzogurf5jfg1.png?width=1747&format=png&auto=webp&s=6e374408560f27476fe005ce40d67e80a6a5a686

Same \~85% winrate as **SPY**, though this test was started from 2011 not from 2006 as SPY. The Returns were impressive too.

**AAPL**

* **Core Returns**
   * Total Return: **1193.88%**
   * CAGR: **13.77%**
   * Profit Factor: **1.82**
   * Win Rate: **85.53%** (136 wins / 23 losses)
* **Risk Metrics**
   * Max Drawdown: **42.62%**
   * Sharpe Ratio: **0.56**
   * Sortino Ratio: **0.87**
   * Calmar Ratio: **0.32**
   * Avg Profit: **$19,535.17**
   * Avg Loss: **–$63,604.53**
* **Position & Efficiency**
   * Time Invested: **61.18%**
   * Avg Positions Held: **0.59**
   * Avg Hold Time: **27.1 days**
   * Longest Trade: **299.0 days**
   * Shortest Trade: **1.0 day**
* **Execution & Friction**
   * Total Trades: **159**
   * Total Costs (Fees/Slippage): **$14,976.74**
   * Initial Capital: **$100,000**
   * Final Capital: **$1,293,878.23**

https://preview.redd.it/lab6s5k46jfg1.png?width=1747&format=png&auto=webp&s=f4274200984e87fca92eb3df64416aadca2f194f

Again the 83% winrate is holding up, with similar DD as SPY.

I realized that I've been testing only on stable tickers like ETFs and growth tickers like AAPL/NVDA etc.

I wanted to test on bad performing ticker, like **ABNB**, I mean it's return since IPO is in negative looking at the chart.

* **Core Returns**
   * Total Return: **–13.24%**
   * CAGR: **–2.80%**
   * Profit Factor: **0.89**
   * Win Rate: **73.08%** (19 wins / 7 losses)
* **Risk Metrics**
   * Max Drawdown: **41.23%**
   * Sharpe Ratio: **0.00**
   * Sortino Ratio: **0.00**
   * Calmar Ratio: **–0.07**
   * Avg Profit: **$5,763.86**
   * Avg Loss: **–$17,536.85**
* **Position & Efficiency**
   * Time Invested: **17.28%**
   * Avg Positions Held: **0.20**
   * Avg Hold Time: **55.3 days**
   * Longest Trade: **430.0 days**
   * Shortest Trade: **1.0 day**
* **Execution & Friction**
   * Total Trades: **26**
   * Total Costs (Fees/Slippage): **$473.19**
   * Initial Capital: **$100,000**
   * Final Capital: **$86,755.40**

https://preview.redd.it/zykdgngz6jfg1.png?width=1732&format=png&auto=webp&s=0ad53d553c338a0c0b50136cc68accd3ef5c04cb

There we go, one with negative returns with a bad drawdown. But good winrate applies here too.

Lets try on a boring stock like **KO**

https://preview.redd.it/rchg827e7jfg1.png?width=1756&format=png&auto=webp&s=302fa26f581a927c128939e11ff469f8cfdcc724

Again, another one with \~85% win-rate\*\*.\*\*

**What I learned from this**

1. **Price action patterns do exist,** Fair Value Gaps show up consistently across different tickers
2. **High win rate ≠ good strategy,** 85% wins sounds great, but the losses are 3-4x bigger than the wins. **Though I intentionally used a wide stop loss (ATR × 5) to give trades room to breathe, so large losses are by design, not a flaw**.
3. **The pattern works best on uptrending assets,** SPY, QQQ, AAPL all did well. ABNB (downtrending) lost money even with 73% win rate
4. **Gaps do get fille,** the core idea is valid, price tends to return to fill gaps.

**Is this tradeable?**

To me, Honestly, not as a standalone strategy. The drawdowns (40%) are too high and the risk-adjusted returns (Sharpe 0.28-0.56) are mediocre. You'd be better off just holding SPY.

But it could be useful as a **filter or entry signal** combined with other factors like trend direction, volume, or support/resistance levels.

**Final thought**

Backtest everything. This one wasn't a winner for me, but at least now I know.

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