11/30/2023 0 Comments Stock gap fill strategyIf you don’t yet know which markets and stocks that respond well to fading, we recommend that you learn how to backtest a trading strategy, which is the most efficient way of evaluating a strategy’s historical performance. Now, assuming that you’re trading a market where gaps usually are filled successfully, we’ll outline the steps many traders take to trade gaps, below. It’s definitely an interesting read where we present a lot of relevant information. In an earlier article we looked at the fill-rate of positive and negative gaps, and whether most gaps are filled or not. Some markets, or even individual stocks, will be inclined to fill the gap, whereas others usually take-off in the direction of the gap without filling the gap distance. Now, this assumption might not hold true at all times, but will vary between markets you’re trading. We simply assume that the market is inclined to moving back towards the close of the previous bar, not leaving any distance uncovered. When fading a gap, we do so under the assumption that the market is going to fill the gap. For instance, have a look at the intra-day chart of the rough rice futures market below.Īre Gaps Always Filled? Gaps How to Fade the Gap However, in other markets that aren’t traded that much, they usually are more common. If this happens as the first transaction when a new bar opens, a gap is going to be formed.Īll in all, this means that intra-day gaps seldom occur in very liquid markets, like the S&P500. And if that worse price is significantly lower than the last traded price, and it happens just as one bar finishes and the next begins, the market will see a gap.įor example, if you trade a market with very little liquidity and place an order to buy at $10, you may have your order executed at $10,5 instead. In such cases, you would have to accept a worse price, to get your order filled. The reason is that intra-day gaps form as a result of that there being no one to take the other side of the trade. At least that’s the case when we’re talking about gaps bigger than one tick. Intra-day gaps, alluding to gaps forming in low timeframes like 5,10, or 30 minute, are unlikely to occur in markets with high liquidity. As you might expect, this often causes the stock market to gap over weekends. Thus, they will be inclined to close their positions right before the Friday close, and reenter on the following Monday. For instance, a not insignificant number of market players don’t want to be invested in the market over weekends, in fear that something unexpected will happen. In many markets, like the stock market, there are recurring patterns that can make the market more likely to perform a gap. In short, everything that affects the mood of investors and their willingness to buy or sell the market, will have an impact on the opening price, in turn leading to gaps. In that case, the price would open on another level than that of the previous close. During the time that the market is closed it could be that new information emerges, which affects the price that market participants are willing to pay for the security. This is perhaps the most common scenario, and occurs in nearly all demand and supply driven markets. When it comes to the reasons why gaps occur, there typical exist two scenarios: 1. Gaps are typically divided into bullish and bearish gaps, where the former means that the market gapped upwards, while the latter refers to it opening lower. Follow and Fade Gap Why Do Gaps Occur?Īs you probably know, a gap is when the market “jumps over” some levels in the price, leaving a gap in the price chart. The image below depicts the two options a gap trader has when placing a trade. In other words, if there is a positive gap, you’ll go short, and the other way around for negative gaps. This is often called fading.įading a gap means that you take a contrarian approach and trade in the direction opposite of the gap. While some people will decide to follow the gap, meaning that they trade in its direction, others will take a contrarian approach, and make the opposite move. For instance, some people will regard a high RSI reading as a reversal signal, while others will consider it to be a sign of a strong market that’s worth going long on. Sometimes, two approaches could even be conflicting, in the sense that they are the opposite of each other. In trading, you could go about in many ways in response to a certain pattern or signal forming. Last Updated on 20 April, 2023 by Samuelsson
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