Smaller Opening Gap Statistics

May 6, 2008: 11:36 AM CST

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.

3 Comments

3 Responses to “Smaller Opening Gap Statistics”

  1. Bill Luby Says:

    Fascinating stuff, Corey, thanks for posting.

    I think you may have a book in you entirely on the subject of gaps…

    -Bill

  2. Corey Rosenbloom Says:

    Hey Bill,

    Thanks for the comment! I’m really developing an affinity for morning gaps – despite all I’ve learned and experienced, these simple patterns are providing me more profits with little stress. I’m becoming “the gap guy” but that’s ok. I love these patterns and want to share the reasons with everyone so a book might be a great forum to express my findings!

    Thanks Bill!

  3. Bill Luby Says:

    My pleasure, Corey.

    Not having studied gaps to any significant extent myself, at some point I’d love to hear your opinion about the extent to which gaps are more (or less) likely to be filled based on overbought/oversold indicator readings coming into the trading day.

    Cheers,

    -Bill