gaps and trading

Discussion in 'Trading' started by riskfreetrading, Dec 27, 2008.

  1. You may have read that most of the gaps fill (some even say are filled as if someone decides to fill them).

    What is the percentage of gaps that fill?

    Why is that percentage large (assuming it is true)?

    How do you trade them?

    How long does it take before a gap is filled?

    I find gaps fascinating because it is one of the rare aspects of a market that can easily test any theoretical understanding one may have about markets.
  2. Gaps cause the bulk of the crowd to miss the move and hence they won't join unless it comes back. This lack of participation causes the move to stall and people rushing into collecting the recent rapid windfall gains...

    In the case of insiders, where the price was prior to the gap was the actual worth, the news causes the gap which is quickly taken advantage of by the insider conspirators...:p
  3. Good insight!

    If it is a gap up, in addition to people rushing to take profits you would also add short sellers.

    How do you trade the gaps, for instance the up gaps? How do you decide when to go short?
  4. No. 1 rule would be for it to pull away from the gap sufficiently to make it worthwhile going against the market!
    Then the No. 2-1 rule would be to NOT jump the gun and wait for the proper pattern formation and confirmation of the exhaustion of the rally with no Stops and only counter positions to improve the entry price and staying put till a few ticks prior to the closing(these days there a lot of bailing out prior to properly closing the gap and causing huge retraces and offering second opportunities).
    The No. 2 rule is, Trading gaps requires very deep the best use of them would be to go with the market and the rally while mindful of the gap and that the whole world knows it too so jump the ship early this is no time to be
  5. Spam much??

    Anyway, to the original poster, It depends on the type of gap. I am no expert on gaps, but from what I have gathered "all gaps are not created equal."

    First thing is learn the different types, and the daily chart formations that define the setup.. Then trade accordingly.

    Suri Dudella wrote a popular and useful book (most books suck out there FYI), and touches on the various types, and added some insight that I liked.

    1) Common gap (usually fills but needs to be traded carefully)
    2) Breakaway gap
    3) continuation gap
    4) exhaustion gap

    The preceding days chart patters helps determine what kind it is... Learn these types, so you ar least know what to expect when you are trading it.
  6. Thought I'd just pop my head in and say something.

    Never "traded gaps" per se, other than earnings, which I don't do anymore. 3rd degree burns once in awhile.

    But, from a PA charting standpoint. I would start looking for flags that begin to develop from for an event trade (later break out/down).

    Is this the proper logic to follow? What do other charting traders look for?

  7. Yes. I dont touch the initial move. I let it create a range (channel/triangle, etc) then act accordingly.

    Of course you have the gaps that just run and run from the get go, but its too risky for my liking..
  8. I have seen times where what looks like market manipulation takes place - where a SINGLE crossed order is placed (and filled) way below the market and then an order is rapidly placed (and filled) back at what was the market. It looks to me like that sort of maneuver was done to make certain program type orders kick in - like stop limit orders. That info and $1.00 will get you a cup of coffee ;-)
  9. In a down trend, sell the gap up.
    In an uptrend, buy the gap down.
    Other than that, you're on your own. :eek:

    I agree with the OP, gaps are fascinating!
    Anyone ever heard of <b>Gap Strategy Trades</b>?

    Here's one I posted 5 or 6 months ago.......ya gotta pull up your own recent chart to see how well these things can work.

    I'll just copy and paste for all, here it is:

    One of many trading strategies that I was introduced to by my dear friend and pro trader, Janny - thanks for this trading strategy!!!
    Some claim it is over 90% reliable, I tend to agree and have posted it here - DYODD!

    Laying out the rules..........

    The gaps that come into play, or are to be excluded in the strategy, are:
    1.The gap days intraday move should be smaller than the gap itself.
    2.Gaps that are happening because of a buyout are to be excluded.

    Only the first ones are to be used as a gap trade.
    As a picture shows more than a thousand words. here some examples:

    As you can see......some stocks take only one day to maybe a week or so to hit the target! Others take 3 months or <u>even longer.</u>

    How to calculate the target:

    For an up gap: Take the gap days low and extract the previous days high. Add the difference to the gap days low. GOOG for example: Gapdays low $524.77, minus previous days high of $459.37. Is a difference of $65.40.

    $65.40 + $524.77 gives a gap target of $590.47.

    Now for a gap down:

    For a downgap: Take the previous days low and extract the gapdays high. Extract the difference from the gapdays high.

    VMW for example: Previous days low is $78.15, minus the gapdays high of $59.99 is a difference $18.16.

    $59.99 minus $18.16 is a gap target of $41.83.

    (Don't forget that the daily move during the gapday should be less than the gap itself. If it already reaches the target during the gap day, the gap is to be discarded as a "gapplay")

    But remember:

    "For me the "gap target" is just a nice tool in short term trading. It gives the traders a sure goal or target where the stock may go. Just look at it as a different "pattern" you can use to trade. Like you would look at a "cup and handle" or "head and shoulders" formation."

    The Strategy is not to use with a total disregard of all other trading rules! Do your own due diligence still counts more than everything!

    Happy New Year!

  10. Here is the statistical scan that shows percent fills etc.

    Plug into stickfetcher

    * gap fill statistics */

    set{Xgapped, open - close 1 day ago}
    set{Xgapup, count(Xgapped > 0, 1)}
    set{Xgapdn, count(Xgapped < 0, 1)}

    set{absgap, abs(Xgapped)}

    set{gappedup100, count(Xgapup > 0, 100)}
    set{gappeddn100, count(Xgapdn > 0, 100)}

    set{cl1lo, close 1 day ago - low}
    set{hicl1, high - close 1 day ago }

    set{fillup, count(cl1lo > 0, 1)}
    set{filldn, count(hicl1 > 0, 1)}

    set{gapupfilled, Xgapup * fillup }
    set{gapdnfilled, Xgapdn * filldn }

    set{gapup100f, count(gapupfilled > 0, 100)}
    set{gapdn100f, count(gapdnfilled > 0, 100)}

    set{gapfilled, gapup100f + gapdn100f}

    /* DRAW PLOTS */



    and add column gappedup100
    and add column gappeddn100
    and add column gapfilled
    and add column gapup100f
    and add column gapdn100f

    and add column cma(absgap, 100)
    and add column absgap 100 day high
    and add column absgap 100 day low


    AVERAGE VOLUME(90) ABOVE 2000000



    Original work created by TheRumpledOne
    #10     Jan 1, 2009