Gap Fills: Statistics & How to Trade Them

what is gap fill

Another possibility is that a big change happened in its technical or fundamental indicators. You continue to see it reach all-time-highs every few years or so. Gaps can fill during the same day they form or they can take several days to fill.

Most gaps typically occur during pre-market or after-hours trading. The term gap fill refers to the eventual return of the asset to its pre-gap price level. Trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading.

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. By definition, gaps occur quickly and without notice, making it difficult to position in advance of a price gap. You might be lucky and long a security, and it gaps higher, leaving you with a quick profit, or vice versa.

We discuss below four often employed methods by investors who want to trade gaps. This happens when the reverse is true – a piece of bad news or a continued downward trend causes a loss of interest from several investors. Breakaway gaps typically do not fill out quickly since they mark a deviation from the previous pricing band. Something as minor as a stock going ex-dividend during a low-volume trading period can create one.

How can I take advantage of a gap?

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. 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!

These gaps typically occur in response to after-hours news, but they can also result from a spurt of increased trading in the middle of a larger trend. It’s important for traders to correctly identify the type of gap they’re trading and to wait until a directional movement has formed before entering a trade. Like any price movement, a gap moves either up or down and either direction can produce tradable setups. But as is true with many technical patterns, searching for gapping stocks can produce a lot of false positives. Gap traders care about sharp, aggressive price movement here.

  1. They can be caused by a stock going ex-dividend when the trading volume is low.
  2. For day traders who focus on low-float stocks, float rotation is an important factor to watch when volatility spikes.
  3. In our example, you see that the majority of gaps from 0.5% to 1.99% close within two days.
  4. We find gap trading to be reasonably difficult, at least in the most popular indices and asset classes.
  5. My content comes from my experiences and the experience of fellow traders.

A gap occurs when the market price of a security jumps to another price level, either higher or lower, where little if any trading has taken place. A good example is an unforeseen comment from a senior Fed official regarding the direction of interest rates. Once the comment hits the newswires, markets may react immediately, with market makers pulling their bids and offers.

But, of course, if that happens, we won’t be worried about gaps anymore. We’ll probably be looking for new jobs, or scrambling to live off the land because the global economy has collapsed. As you see in the statistics above with the Nasdaq QQQ ETF, market gaps down fill more often than market gaps up. A gap up happens when a stock opens above the top of the previous candlestick. A gap down happens when a stock opens below the bottom of the previous candlestick.

Some are excluded for good reason, some for no reason at all. Most people only think of the first way, which is to “fade” the gap. That’s when you trade against the gap, looking for a gap fill. This implies at least a slight tendency for gaps to fill, without it being a hard rule that gaps need to be filled.

For this, I looked at how many gaps didn’t fill on day 1, but did fill on day 2. I also calculated these separately for the two gap directions. So, you have gap down statistics calculated separately from gap up statistics. As you’ll see, direction does make a difference https://www.wallstreetacademy.net/ in how often gaps fill. For the following tables, I used historical data from the inception (first day of trading) of the QQQ Nasdaq ETF. Benzinga Pro is a financial news and research platform developed in and delivered from Benzinga’s headquarters in Detroit, Michigan.

Fair Value Gaps & Liquidity Voids: Examples, Explanation, & How to Trade

These are in many ways naive and we are not using them ourselves in our trading. As computer power and the number of traders have grown, the profitability of gap trading is diminished, unfortunately. Typically, these happen after extended moves either up or down. Finally, when it comes to gap fills and maximizing profits, it pays to be patient and disciplined. Don’t jump into any trades without doing your research first, as this can lead to costly mistakes that could erase any potential profits.

what is gap fill

Gaps are areas on a chart where the price of a stock (or another financial instrument) moves sharply up or down, with little or no trading in between. As a result, the asset’s chart shows a gap in the normal price pattern. The enterprising trader can interpret and exploit these gaps for profit.

What is a Gap Fill in Stocks?

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. With the help of these concepts, investors can better anticipate when gaps will form and use them to their advantage. By understanding trend lines, investors can better understand when a security may be overextended and when it might be ready for a reversal. This can happen if a positive piece of news is tempered after analysts point out other issues in the underlying security.

Is gap trading profitable?

Exhaustion gaps happen near the end of a good up or downtrend. They’re identified by high volume and a large price difference between the previous day’s close and the new opening price. They can easily be mistaken for runaway gaps if you overlook the exceptionally high volume.

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Not only do they make frequent appearances in stock charts, but gaps create opportunities for significant profits due to the volume and volatility that accompanies them. Gaps often materialize due to a catalyst – a bad earnings report, increased guidance, a company scandal, etc. News is often released after hours or in premarket, where experienced traders and investors tend to throw their weight around. As volatility increases, more traders are drawn to the stock, and volume increases.

Gap trading can create opportunities for both long and short positions, making it a popular technique amongst bears and bulls. Price gaps can be crucial indicators of shifts in trading activity. Gaps provide valuable insights into market sentiment and potential trading opportunities. Recognizing and understanding the different types of gaps can be an invaluable asset for traders at all levels.

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