Today marked yet another opening gap that filled in the major US Stock Market Indexes. Gaps are one of my favorite opening patterns to play because they can provide a dual edge for traders. By ‘dual edge’ I mean they can provide a higher % win rate and also generate more profits when correct than losses when incorrect. Let’s look at the statistics for smaller index opening gaps and then view a chart of the whole spectrum.

Previously, I examined Large Opening Gaps on the US Indexes (specifically the DIA, or Dow Jones ETF) from January 3rd 2000 to the present (n=2,065 trading days) and found the following:

37% of DIA gaps (n=121) greater than $1.00 filled (which generally creates a negative edge depending on your stop-loss strategy)

44% of DIA gaps (n=16) greater than $2.00 filled (which creates a positive edge if your stop is around $0.50 to $1.00 or less on losing trades)

67% of DIA gaps (n=3) greater than $3.00 filled (which creates the dual edge concept)

But what about smaller gaps?

60% of DIA gaps (n=1,087) of at least $0.25 filled (again, creating a potential dual edge)

57% of DIA gaps (n=839) of at least $0.35 filled (potential dual edge)

52% of DIA gaps (n=507) of at least $0.50 filled (slightly with a dual edge)

43% of DIA gaps (n=237) of at least $0.75 filled (eroding the dual edge concept)

38% of DIA gaps (n=188) of at least $0.85 filled

The following chart shows $0.05 increments and the corresponding percentage of gaps filled for each gap:

(click for larger image)

The % of gap fills decline as the size of the gap increases, but around $1.50, the trend reverses (due to the fact that fewer gaps occurred at these levels which skews the percentages).

Keep checking back for more insights about the classic Gap-Fade strategies and other statistics and charts from previous decades on how this strategy performed.