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Gap Fill Trading Strategies 2024 Analyzing Opening Gaps Backtest

In general, stocks tend to be better to fade the gap, while other asset classes are less inclined to revert to the mean. In the stock market, almost all gains over the last 30 years have come from owning stocks from the close to the next open (please read more in the article linked above). The test was performed on EOD data from Yahoo! (open, high, low, and close per day). The strategy seems very robust and yields very good numbers. The reason is that some of the high and low quotes are wrong, boosting the numbers. That’s why I’ll write a second article on this strategy and test it on intraday data from IQFeed.

A gap is a large change in the value of a financial instrument with no major buying or selling activity in between. Most of the offers that appear on the website are from prop firms and software companies from which receives compensation. This site does not include all prop firms or trading tools available.

  1. The most attractive trading opportunity with gaps is to go long or short as the market moves to close, or fill, the gap.
  2. After a gap down, this means that the price rises to the bottom of the pre-gap candlestick.
  3. It’s better to get the direction of a continuation or fill correct than to enter a position too early and be proven wrong in your analysis.
  4. However, as computer power and the number of traders have increased, the profitability of gap trading has diminished.

Increased buying interest happens suddenly, and the price gaps above the previous day’s close. This type of runaway gap represents a near-panic fx choice broker review state in traders. Also, a good uptrend can have runaway gaps caused by significant news events that cause new interest in the stock.

Gaps in stock prices are more likely to be filled on certain days of the week. The data and statistics suggest that later in the week, particularly on Fridays, gaps in stock prices are more likely to be filled. However, the reasons behind this trend are not fully understood.

Bear Trap Trading Strategy (Rules, Backtest, Performance)

If you follow a gap, you sell a gap down and buy a gap up. As you can see, EWA closes around 19 and opens the next day at below 17 – a pretty kraken trading review 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.

Iceberg orders are a type of trade typically placed by institutional investors. They are designed to mask the size of an order, such that only a small portion of the total trade – the tip of the iceberg – is visible to the market. In my first post about opening gaps, I faded (going against the gap) gaps under 0.6%. In my findings below I’m fading every gap between 0.1% to 0.6% (and vice versa).

Gap Fill Statistics Table – Up Gaps, Filled Same Day (QQQ)

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. Prices drop, and a significant change in trend occurs (see chart below for an example of an exhaustion gap). The three most common types of gaps are runaway gaps (breakaway gaps), exhaustion gaps, and common gaps. Are you wondering what a breakaway gap is in the stock market and how to identify one? A breakaway gap is a move that traders pay close attention to for its strength and implications on market direction.

What Are Common Gaps?

For an up gap to form, the low price after the market closes must be higher than the high price of the previous day. As computer power and the number of traders have grown, the profitability of gap trading is diminished, unfortunately. Trading halts can be a big deal for active investors, particularly if you are holding a stock that temporarily can’t be traded. But since trading halts are relatively rare, many traders don’t know why they happen or how they work. These days we can even trade gaps up until 0.75% with very good results. I decided to research opening gaps in SPY (S&P 500) to find fade-the-gap strategies.

In the chart below, note the significant increase in volume during and after the runaway gap. They are common gaps, breakaway gaps, runaway gaps, and exhaustion gaps. pepperstone canada Price gaps can be crucial indicators of shifts in trading activity. Gaps provide valuable insights into market sentiment and potential trading opportunities.

Such temporary intraday gaps should not be considered as having any more significance than normal market volatility. However, as computer power and the number of traders have increased, the profitability of gap trading has diminished. What worked well before may not be as effective in today’s market.

It forces fence-sitters on the wrong side of the gap price to close their positions and move out. If this happens, the security might sometimes end up with a gap the next day. 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. The content on this site is for informational purposes only and does not constitute financial advice. To trade gap fills, you need to develop gap-fill setups in which you have an edge.

Something as minor as a stock going ex-dividend during a low-volume trading period can create one. Common gaps are usually small ones that do not happen due to major events and get filled up quickly. In recent years, automated program trading has made gaps more common. One could be that a major piece of news related to the security comes out after hours. We did a deep dive to understand gap-fill trading, and this article will give you the answers to all such questions.


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