Filling the gap is a popular strategy where you buy a stock when it gaps down in the morning and then wait for it to fill the gap. Many bloggers have written about how good this strategy is. However, there usually isn’t much evidence to support those claims.
How to find gap stocks?
· A gap on a chart is considered to be filled when the price action moves back through the open gap area where transactions were missing. Price must retrace all the way to the closing price of the previous day before the gap. Once price has returned to where it was before the gap day it is technically filled.
How to find gap stocks in the premarket?
· Continuation gaps, also known as runaway gaps, occur in the middle of a price pattern and signal a rush of buyers or sellers who share a common belief in the underlying stock's future direction. To...
Do all gaps need to be filled?
· Filling/Fading- This is when a gap has opened but runs into a brick wall (either top or bottom) due to weakening or a technical analyst play. For example, an upward gap may have grown as a result of anticipation about an imminent announcement, but traders will cause the gap to disappear by shorting the stock and using technical analysis.
Are gaps always filled?
· A gap fill in stocks is when a stock's price moves above or below the close of the previous day in the aftermarket hours, and the stock then trades back through the gap. Intro …
Why do stocks need to fill gaps?
3:066:23What is a "Gap Fill"? (Stock Market For Beginners) - YouTubeYouTubeStart of suggested clipEnd of suggested clipAll a gap fail means and this can happen in the same day it can happen within minutes it can happenMoreAll a gap fail means and this can happen in the same day it can happen within minutes it can happen within months years weeks days there's no set time period but at some point all a gap fill means is
Is filling a gap bullish?
Up gaps are generally considered bullish. A down gap is just the opposite of an up gap; the high price after the market closes must be lower than the low price of the previous day. Down gaps are usually considered bearish. Gaps result from extraordinary buying or selling interest developing while the market is closed.
How do you trade down a gap?
In order to successfully trade gapping stocks, one should use a disciplined set of entry and exit rules to signal trades and minimize risk. Additionally, gap trading strategies can be applied to weekly, end-of-day or intraday gaps.
How do you predict gap up and gap-down opening?
Understanding gap-ups and gap-downs A full gap up occurs when the next day opening price is higher than the high price of the previous day. Check the chart below, where the green arrow depicts the gap up point. A full gap-down occurs when the opening price of the stock is lower than the previous day's low price.
Gaps – What Are They And Why Do They Happen?
US stock markets open each day with an auction method. Pre-market buy and sell orders are matched by designated market makers (DMMs) and special liquidity providers. This is intended to improve liquidity and make the opening of the market as orderly as possible.
Example Trade Setup
The following chart shows the kind of gap fill trade we are looking for with this strategy. You can see that ADBE opens >1% below the previous day low on May 18th. We therefore go long on the next 1-minute bar.
Why Compare Backtest Results?
There are two reasons why I want to compare the results from intraday data vs end-of-day data.
Filling The Gap Backtest Results
I ran a backtest on a watchlist of 20 randomly selected Nasdaq stocks between 1/2008 – 1/2018 using a starting balance of $50k and transaction costs of $0.01 per share. In the next table you can see a summary of the results on EOD data and on 1-minute data.
What To Make Of These Results?
I believe we can make at least a couple of conclusions from this analysis.
What are Gaps?
A gap could be regarded as a hole in the price chart, where no trading took place. In other words, you could say that the price “jumped” a certain distance, meaning that it closed at one price, and then opened higher or lower, without touching the intervening levels.
What Does Fill the Gap Mean?
Well, when a market “fills the gap”, it simply means that it fills the empty space which is the gap itself. So if the market gaps higher, it will fill the gap first when it gets back to the previous day’s close.
Why and When Do Gaps Form?
Gaps usually form as a result of low liquidity, or over-night, as the market closes and then reopens the next day.
Fill Rate of Gaps in the Market: Market Study
With this information out of the way, we’ll perform a market study to get some statistics on the actual fill rate of gaps.
What Happens After a Gap?
With these statistics out of the way, you might want to know what tends to happen after a gap has formed. After all, the gap-fill rate doesn’t tell us the size of the bearish or bullish moves, which could be interesting to know.
Do Gap Strategies Really Work?
Yes, they do! Even though the results you’ve been presented with above don’t suggest that gaps on their own can be traded successfully, you certainly can build great gap strategies. Y ou have to remember that there are endless variations of filters and conditions you could add to remove false trades.
Conclusion
A gap is when the market jumps from one price level to another, and leaves the intervening prices untouched. Typically, gaps form overnight as the market reopens for the next trading session. However, in illiquid markets, it’s common to see gaps form also intraday.
What is a gap?
A gap is defined as a price level on a chart where no trading occurred. These can occur in all time frames but, for swing trading, we are mostly concerned with the daily chart.
Filling the gap
Sometimes you will hear traders say that a stock is "filling a gap" or they might say that a stock has "a gap to fill".
Types of gaps
Traders have labeled gaps depending on where it shows up on a chart. It isn't really necessary to memorize all of these patterns but here is the breakdown so that you can impress your trading friends.
Professional vs. amateur gaps
When you are looking at gaps on a stock chart, the most important thing that you want to know is this:
Methodology
With Python+pandas, I fetched historical stock price data of 30 Dow Jones Industry (^DJI) components from Yahoo, dated 10/27/1989 - 10/11/2013 (24 years). Since Dow stocks are all sound companies and their prices have overall long term uptrend, most "down" gaps should have got filled. So I only studied "up" gaps.
Conclusion
So what's that mean: when a stock price gap is observed, by a chance of 91.4% it will get filled in the future. In layman's word, 9 in 10 gaps get filled; not always, but pretty close.
Supplement: Nasdaq-100
If you are not convinced with "only" 30 stocks in the DJI, I have conducted further analysis with Nasdaq-100 (^NDX) index. Data range (10-27-1989 -> 11-13-2013). I also tried to exclude or include gaps formed in last year. Here, I only shared the data with last year gaps excluded, which I found better.
Gaps – What Are They and Why Do They Happen?
Back-Testing A ‘Fill The Gap’ Strategy
Example Trade Setup
Why Compare Backtest Results?
Filling The Gap Backtest Results
- I ran a backtest on a watchlist of 20 randomly selected Nasdaq stocks between 1/2008 – 1/2018 using a starting balance of $50k and transaction costs of $0.01 per share. In the next table you can see a summary of the results on EOD data and on 1-minute data. The white columns show the backtest metrics for EOD data while the grey columns show 1-min r...
What to Make of These Results?