AJ Monte: Why Gap Fills Work 80% Of the Time, & How to Trade Them

what is gap fill

Instead, we usually get a decline that fills some of the gaps up, but not all of them. And because the market spends the majority of its time going up, these gap fills happen less often. This historical upward movement of markets means that gaps down fill more often than gaps up. At any given time, we could have zero unfilled gaps down, and dozens or hundreds of unfilled gaps up.

Fill rate of gaps in the S&P 500: facts

These gaps are generally not filled and can be a strong indicator for trend direction. Notice in the chart below how prices spent a few weeks consolidating. Prices broke above resistance at low volume and pulled back. The following breakaway gap took place with high volume, indicating a significant bullish shift in sentiment and triggering the start of a new uptrend.

What causes price gaps in financial markets?

The likelihood of a gap getting filled depends on various factors, including the type of gap and market conditions. When trading gaps, there are several key rules to consider. These rules can help you maximize profits while minimizing risk.

Strategies for Trading Bullish Gaps

It is almost a state of panic if the gap appears during a long down move where pessimism has set in. Selling all positions to liquidate holdings in the market is not uncommon. Exhaustion gaps are quickly filled as prices reverse their trend. Likewise, if they happen during a bull move, some bullish euphoria overcomes trades, and buyers cannot get enough of that stock. The prices gap up with huge volume; then, there is great profit taking, and the demand for the stock totally dries up.

What worked well before may not be as effective in today’s market. Gaps occur due to news, imbalances, or other factors between the close and the open, leading to a higher or lower opening price the next day. Overnight gaps are the most frequent and result from events or news during non-trading hours.

Automated program trading (i.e., algorithmic trading) is a relatively new source of gap price action. The algorithm might signal a large buy order if, for example, a prior high is broken. The size of the algorithmic order may be such that it triggers a price gap, breaking above the recent high and drawing in other traders to the directional movement. Gaps occur because of underlying fundamental or technical factors. For example, if a company’s earnings are much higher than expected, then the company’s stock may gap up the next day.

what is gap fill

I make every effort to keep things as current as possible, but these changes don’t happen instantaneously, and companies can change terms at any time day or night. I am not responsible for discrepancies, when in doubt, rely on the other company. I am a trader, with many years of experience trading for prop firms. My content comes from my experiences and the experience of fellow traders.

Why is gaps much better when yesterday’s close is lower than 0.25? Both long and short are better with a nice and steady upward sloping equity curve. I decided to research opening gaps in SPY (S&P 500) to find fade-the-gap strategies. After all, many traders claim to make good money on this strategy, at least according to my web search.

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It can be used for both short-term market movements, such as intra-day trading, or longer-term trend following strategies to make profits. Gaps on a chart show that there were no buyers and sellers connecting at price levels on a chart. Gaps happen mostly when news comes out that instantly changes prices to much higher or lower prices than they were previously trading at.

For example, if a stock opens higher than the previous day’s high, prices might eventually drop to fill that gap, which could indicate a reversal in price action. A common gap usually appears in a trading range or congestion area, reinforcing the apparent lack of interest in the stock. Being aware of these types of gaps is good, but it’s doubtful that they will produce trading opportunities.

Breakaway gaps occur at the end of a price pattern and signify the beginning of a new trend. These are often seen in charts following significant news events and are less likely to be filled. Stocks can gap due to several factors, including news releases, earnings reports, or changes in market sentiment. Understanding the cause of the gap is crucial for trading it effectively. For instance, an earnings report can result in a gap that may or may not get filled, depending on the company’s performance and Wall Street’s reaction. You should read this article because it provides a comprehensive guide on how to trade gap fills in stocks, offering actionable strategies and key rules to maximize your profits.

When trading with common gaps and gap fills, risk management considerations are essential for maximizing profits and minimizing losses. Gaps typically happen in response to news or other events and usually after market hours when there isn’t a chance for the stock price to rebound due to lower trading volumes. For example, a positive earnings report after market close could cause the price of a stock to gap up. Financial advisors who use these tools can help identify stocks that could benefit your portfolio.

As a general rule, the bigger the gap, the less likely it is to get filled, at least it will take a longer time. The average gain per trade is 0.48 and the profit factor is 1.8. Not a spectacular strategy, but works reasonably well, most likely because of the extra risk premium of the gap down opening. Most of the time this strategy holds the S&P overnight but exits on the same day if it manages to fill the gap and close higher than the day before. Bearish gaps (gaps down) are most likely easier filled because of the upward bias in the stock market. In general, stocks tend to be better to fade the gap, while other asset classes are less inclined to revert to the mean.

Before you even think about becoming profitable, you’ll need to build a solid foundation. That’s what I help my students do every day — scanning the market, outlining trading plans, and answering any questions that come up. If we test on a longer time fra by using SPY, the average per trade is still around 0.5% and has a rising https://forex-reviews.org/ equity curve. It turns out the very big gaps, lower than -0.7%, have an expectancy of -0.11% per trade. As you can see, EWA closes around 19 and opens the next day at below 17 – a pretty big gap down. For example, if the close yesterday was 100 and today the stock opens at 95, there is a gap between those two points.

These squeezes offer opportunities for trading, but they often require different strategies and more caution than traditional breakouts. Float rotation describes the number of times that a stock’s floating shares turn over in a single trading day. For day traders who focus on low-float stocks, float rotation is an important factor to watch when volatility spikes. High trading volume in the direction of a gap is usually a sign that the gap will continue rather than fill, especially if the gap is in the same direction as an underlying trend. Low volume typically signals an exhaustion gap or a coming fill.

The area near the top of the congestion area is usually a resistance area when approached from below. Likewise, the area near the bottom of the congestion area is a support area when approached from above. To break out of these areas requires market enthusiasm and either many more buyers than sellers for upside breakouts or many more sellers than buyers for downside breakouts. Gaps appear more frequently on daily charts—every day presents an opportunity to create an opening gap. If you’re looking at a weekly chart, the gap would have to occur between Friday’s close and Monday’s open. If you’re looking at a monthly chart, the gap would have to be between the last day of the month’s close and the first day of the next month’s open for monthly charts.

Something as minor as a stock going ex-dividend during a low-volume trading period can create one. In recent years, automated program trading has made gaps more common. One could be that https://forexbroker-listing.com/bitfinex/ a major piece of news related to the security comes out after hours. A gap is a large change in the value of a financial instrument with no major buying or selling activity in between.

If we manage to find profitable gap trading strategies we believe are robust and less likely to be a result of chance, we might publish them as a Monthly Trading Edge. Finance (for example) you can only trust the opening and the closing prices. Always assume the high and low are erroneous prices that happen because of OTC trade reports (or trades done days ago being reported late). As we wrote earlier in the article, gap trading strategies are not as good as before and you need to tweak them to make them work. The above is a daily chart, but gaps happen in all time frames – even intraday charts when news is published. Gap trading strategies have been a popular tool for many decades.

Additionally, traders should have stop-loss orders in place to limit losses if a trade goes against them unexpectedly. Finally, chart patterns can be extremely helpful when trading gap fills. By recognizing the shape of the chart, investors can get an idea of how prices might move in the future. For example, a “head and shoulders” paxful review pattern may indicate that prices are ready to reverse direction after reaching their peak. Technical Analysis is an important tool to consider when trading gap fills. This type of analysis focuses on historical data to identify patterns and trends, allowing investors to make better decisions and increase their profits.

These days we can even trade gaps up until 0.75% with very good results. For me, this is unknown territory as up until this date I have only been day trading stocks, and my experience in trading indices is close to zero. The strategy seems very robust and yields very good numbers.

what is gap fill

He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. TrendSpider’s Strategy Tester is the industry’s easiest, fastest, simplest, and most powerful way to create, test, and refine trading strategies. Understanding where these levels are can help investors identify when to buy or sell for optimal gains. Hence investors must exercise their judgment while using such trading strategies. This strategy assumes that the stock will again come to the point where the gap was created after some time.

Buyers take control and the “vacuum” forces the buyers to pay more to tempt sellers to sell. One of them has sold 30,000 copies, a record for a financial book in Norway. The win rate is pretty good, but the average is below other Fridays.

  1. In addition, StocksToTrade accepts no liability whatsoever for any direct or consequential loss arising from any use of this information.
  2. Let’s look at a few examples of what a 1D chart gap looks like in real-life.
  3. For example, if an unexpectedly strong earnings report comes out after the market has closed, a lot of buying interest will be generated overnight.
  4. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading.
  5. Gaps vary in size, variations, and volume depending on the asset you are looking at.

Most of the time, there is a tendency for stock prices to revert to the mean and fill the gap. Gaps occur when the fundamental or technical factors of a stock get significantly changed during a period of low trading (such as after market hours). This is based on the often-seen tendency for asset prices to revert to their mean. Trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment.

Most do not offer many opportunities for traders to take positions or generate profits. By placing large, decisive bets in after-market transactions, algorithmic trading can trigger price movements. The origin of the term “gap” lies in a sudden deviation in the trading chart of the financial instrument from its normal price patterns. The term gap fill refers to the eventual return of the asset to its pre-gap price level. In this article, we’ll be detailing the inverse version of the well-known head and shoulders chart pattern so you can start effectively incorporating it into your trading.

When he’s not at a computer, you can find him on the ocean, in a canyon, or in the mountains. To trade gap fills, you need to develop gap-fill setups in which you have an edge. How you do that depends on your strategy and your own personal situation. Using the same Apple chart from above, let’s annotate where those gaps were filled. This is not an offer to buy or sell any security or interest.

To see how gaps behaved during the Dot-Com era, take a look at this Dot-Com Bubble chart. There are different types of stock gaps, and each has its own trading implications. Knowing the type of gap you’re dealing with can significantly impact your trading strategy.

Every time the market is at all-time highs, that means it has filled all the gaps down. Then, I calculated how many gaps were filled within two days, regardless of whether they filled day 1 or day 2. Gaps fill more often than most people think, but you have to crunch the numbers for a specific symbol to see how often gaps fill for that instrument. Fortunately for you, I’ve done that, and here’s some cool data on QQQ gap fills. A gap is said to “fill” when the price of a stock moves back to the pre-gap level.

Market activity before the official opening can predict the gap opening, and statistical analysis can offer insights into the probability of gap ups or downs. Also, overnight futures trading shows where the market will open, but it might change on short notice. Better trading performance starts with using better trading tools. TrendSpider is the only institutional-grade market research and trading platform available to retail investors. However, leverage can also magnify losses and has the potential to wipe out a trader’s account in no time if not managed properly.

They can be resisted, but they provide an added “pull” to a stock’s price action. Regardless of why these gaps often get filled, it’s worth adding this simple charting concept to your trading arsenal. Some traders use gap trading strategies, while others approach gaps with caution, considering them as potential areas of price acceleration or reversal. As with any trading strategy, you should rely on thorough research and risk analysis before making a trading decision based on gapping patterns. Gaps in stocks occur when a stock’s price jumps suddenly between two candlesticks, leaving behind a vertical gap in a chart.

Continuation gaps are usually seen in an established trend, occurring when there’s high demand and little resistance to price movement. These types of gaps can be used as confirmation that the current trend will continue. In other words, if you’re looking for confirmation that a trend is still going strong, pay close attention to gaps! They can give you a better idea of where the trend might be headed.

There are various gap trading strategies you can explore can apply to your trading. This usually represents increased stock liquidation by traders and buyers standing on the sidelines. The price has to continue to drop and gap down to find buyers. A price chart with gaps that occur almost daily is typical for thinly-traded securities and should probably be avoided. Prices often gap up or down at market open, but the gap does not last until the market closes. Such temporary intraday gaps should not be considered as having any more significance than normal market volatility.

The gap is filled relatively quickly, but it continues to act as resistance (horizontal yellow arrow), suggesting that downside potential remains. Finally, on the right side, in the midst of a reversal higher, we see a strong runaway gap indicating further upside potential. This article will help you understand how and why gaps occur, and how you can use them to make profitable trades. Understanding the characteristics of each type of gap can help traders determine the likelihood of a gap being filled and make more informed trading decisions.

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