Market Cleanly Fills the Gap

Apr 15, 2008: 10:07 AM CST

Today’s price action so far has been nothing shy of stellar and ideal for those who love to ‘fade the gap’.

If you would like to know what a clean and ideal gap fade trade looks like, then keep this one for your records.

The market opened with a relatively large impulse up that was smoothly and quickly faded, with only two ‘up-candles’ on the way down (this is a 5-minute chart of the DIA – Dow Jones ETF).

Generally, I give 10 to 15 minutes (2 to 3 bars) before entering a gap fade and I place a stop 50% of the distance to my target, which is yesterday’s close.

In this case, entry would have been near $123.70 with a target near $123.20 (which is $0.50) and I would place a stop at or just above $124.00.

Recall that the reason I love gap fades is because they give a sort of rare ‘dual edge’:

First, the odds of filling (provided the gap is less than 100 Dow Points) are higher than 50% and

Second, the profit you gain when the gap fills is higher than the money you lose when it does not.

Also, gap-fades have the added benefit of being extremely easy to recognize, place targets, and stops and you don’t need a complex strategy or complex indicators.

For more information, see my previous posts:

Gap Fade Statistics for January (70% of gaps filled)
Gap Fade Statistics for February (53% of gaps filled)
Gap Fade Statistics for March (70% of gaps filled)

Gap fades are one of the market’s jewels in my opinion. This strategy likely won’t work forever, but in the current environment, it seems to be working quite handsomely for aggressive traders.

2 Comments

2 Responses to “Market Cleanly Fills the Gap”

  1. jordan Says:

    Hi Corey,
    The definition of gap you use here is previous day to today’s opening price?

  2. Corey Rosenbloom Says:

    Hey Jordan,

    Yes, a gap occurs when today’s open differs from yesterday’s close.

    StockCharts.com doesn’t record the data exactly, because it gives I think 15 to 30 minutes of “after-hours” market data in its visual chart, but it’s dotted line is the close. This is why StockCharts.com gives a slightly distorted picture.