Day Traders Love to fill and fade gaps. Gaps often create great opportunity in volatile markets. Trading for an opening gap fill has long been a strategy among active short-term traders on any given day. Obviously, many days the gaps are relatively small and, therefore, do not offer much opportunity. But, on days with larger opening gaps in the market, a prominent short-term strategy is to fade the gap. The data from 2009 confirm this concept as a legitimate strategy with a significantly better-than-breakeven probability of success.
Based on Trade Flight Plan’s study, trading for a gap fill every day in 2009 would have had a success rate of 66.5%. Friday’s session filled the gap in 2009 far more often than Monday’s, an interesting dynamic. The lower likelihood of a gap fill on Monday is probably a result of the more valid adjustment of prices from untraded weekend events. A greater number of events must be accounted for in the opening Monday prices, seemingly making those prices somewhat more reliable. If you have time for a longer position then you could have above an 80% success rate.
You should try to look for a position within the first hour. If the gap is left unfilled after the first hour, typically the market will trend in the direction of the gap. This continuation strategy is the most effective when trading larger gaps (roughly greater than 1%). Based on the chart, out of the 66.5% of the days that the gap is filled, 2/3 of the time it happens in the first hour of trading. This supports the effectiveness of the strategy throughout 2009. I will continue using this strategy throughout 2010 and beyond especially as I see the markets becoming much more rangebound in the future.
Trading is all about managing risk and lookig to trade with high probability. So you should look to fill and fade the gap when possble because you have a higher proablility of making money. There are a couple of strategies involved. Sometimes you get a headfake and the stock will not fade the gap. It will do a temporary dip on the macd and then catch support and run up. The best way to trade that is catching it after it breaks the day high. You should should always confirm your trade on a couple different time frames at least.
Notes: Trade Flight Plan calculated gap fills from the E-mini S&P 500 futures from 9:30 to 4:00 (not the 4:15 futures closing time). The gap fill is defined by price action that touches or breaks through the closing price of the previous trading day.
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