A Closer Look at July’s Gap Fills

Aug 18, 2008: 11:10 AM CST

July had one of the best months in terms of the gap-fill strategy (fading an opening gap), so let’s look a bit closer to see just how this amazing feat was accomplished.

DIA 60 min chart (click to expand):

What I’m showing is through TradeStation’s 60 minute chart, with blue dotted lines representing yesterday’s close and red horizontal lines representing today’s open.  When the lines are equal (or roughly equal), there is no gap.  However, when the lines are separated, there was an opening gap for that day.

I’ve added blue arrows to show the direction price traveled on its pathway to fill the gap (meaning that at some point during the day after a morning gap, the price equaled yesterday’s close, meaning the gap was erased).  You can see that not all gaps were filled easily.  Price did not always just rocket back to fill the gap – sometimes, price continued in the direction of the gap (which would have taken any well-placed stops) and then filled the gap.

On one interesting day (July 11th), price actually had a late day surge to fill a relatively large gap that most people believed couldn’t be filled.  Price formed an almost identical pattern later on July 15th.

Let’s zoom in a bit to see how some of these gap fades were accomplished:

The July 11 – 15 days as mentioned above:

I’m fascinated by gap fade trades, and tend to do very well playing them, as they are easy to recognize, have a greater than 50% chance of filling (in July, roughly 80% of DIA gaps greater than $0.20 filled), and as long as your stop is 1/2 the distance to your target (away from entry) or some sort of risk-management strategy (some traders refuse to use stops on gap fade trades… something I don’t necessarily recommend), the winning trades will make more than the losing trades.

There’s even an entire blog and website dedicated to the Gap Fade/Fill strategy, entitled “Master the Gap” which I’m looking forward to reading.

Let’s continue to see if this strategy will have edge throughout August and beyond.

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