Whenever there is a gap, there is a "gap play". The basic gap plays: 1. Gap-n-Go 2. Gap, Fill, Reverse 3. Gap, Half-fill, Reverse 4. Gap Up, Test low of opening bar, Reverse Up (or Gap Down, test high of opening bar, Reverse Down)... variations of Gap-n-Go 5. Gap, Continue a bit, then Crap 6. Gap-n-Crap We never know for sure which it is... need to "play it by ear". It helps to have an idea when a Gap-n-Crap or Gap-n-Go are more likely depending upon where price is on the chart and/or news.
Thats one for your girlfriend to let you know. But seriously, the question, if relevant, is, are gaps filled that same day (preferably without the gap going further from the market Open)? If the assumption is that the gap is going to be filled the same day, you are unaware of the pitfuls. Gaps sometimes specifically preamble the price moving further in the direction of the gap (eg gap up = market session price up). To know what to expect you would have to consider other parameters.
In John Carter's piece on the CBOT site, he has some interesting comments/observations about trading gaps and the contracts in which gaps are more and less likely to be filled. He observed that Dow gaps get filled with the most consistency because it's gaps usually occur because of news of some sort related to one company -- because the index represents a diverse universe of players, the action of the 49 other companies is likely to bring the whole index back to where "it should" be, i.e., fill the gap. It's a pretty interesting piece. I found it on the Dow page of the CBOT's website -- and no, I don't work for or even know the guy.
With regard to gaps as in much of life the bigger the gap the less likely it is to fill (at least for that day) I love filling gaps but that's a story for a different time.
Statistics for the percentage of NYSE gaps filling the same day by day of the week, from an unknown source I archived years ago are as follows; Monday 65% Tuesday 77% Wednesday 79% Thursday 82% Friday 78% Average of 5 days 79%. The preceding suggest probabilites favor fading gaps. As such, they're bait for the mice to take the cheese. However, the preceding doesn't take into account the SIZE of gaps. It's safe to ASSUME any gap that remains unfilled for 3 days is going to persist in the direction of the gap. Basically become a moat. Virtually all gaps eventually fill, though as long as yearS. Gaps are synthetic price points. Where the specialist CHOOSES to maneuver from. Often he's moving away from a basis established the day before OR ...........to improve his inventory posture. Take the amount of the gap, multiply by the amount of shares outstanding, and determine how many millions the specialist evaporated/created with a flick of his wrist.
I suppose that's why trading gaps can be profitable as a "market inefficiency" is created. Thanks for the stats.
Depends on what time frame your looking at? Intraday gap fills are in the range of 20% that actually get filled. The longer the frame then the better the odds of a fill. Don't forget intraday gaps can make you a lot of money!!! I've traded the gaps intraday for over 6 years with success. It all depends on your system that you use.
Has anyone done any research on gaps vis a vis Fair Value? In other words are gaps in the direction of FV more or less likely to be filled? Let's say FV is +7.30. What percentage of stocks gapping up reversed versus how many stocks gapping down reversed. I know a lot of the Openings Only strategy is based on FV, but sometimes I think OO's are just a regular old "fade the gap" play.
Why does a gap need to be completely filled in order to make money? The answer is it doesn't. Even on large gaps that may not get completely filled the same day there is almost always a partial reversal that can still be played. Larger gaps are much higher percentage plays for me as the moves are often more exaggerated both ways.
on intraday timeframes, I'd imagine you trade in the direction of the gaps..no ? Which timeframe do you find most reliable?