Gap trading - will it stay legit?

Discussion in 'Strategy Development' started by BillySimas, Jun 5, 2008.

  1. I've been doing studies on trading gaps in stocks and YM and I was just wondering about the psychological aspect of it. It's statistically proven that the majority of normal gaps do get filled on the same day, but I was just wondering why this is exactly. Why does the price gravitate towards filling the gap? It's also a valid method to fade stocks that have just filled their gap and playing for a reversal. What is the logical reasoning behind all this, can anyone shed some light? I would imagine that if a stock gaps down overnight, a lot of people are going to want to sell if they can get the same price as yesterday's close, so that could be a valid explanation for why prices often reverse after the gap fills. Other than that, I'm looking for answers here.
     
  2. Check out the book Market Maker's Edge by Josh Lukeman; it has a great section on Gaps. He explains in a simple manner the different kinds of gaps that you're going to find in the market, why some of them revert while others continue, and how to tell them apart.

    happy trading.