Gap Fill Trading Strategies 2024 – Analyzing Opening Gaps [Backtest]
Searching on the internet you can find a lot of articles on how to play the opening gap of the S&P 500. Gap trading strategies are popular.
What is an opening gap? (Gap Fill)
A gap is when the opening price (or print) is higher or lower than the previous close. A gap up indicates the opening is higher than the previous close and vice versa.
Other traders might define gaps more stringent: a gap up is when the opening is higher than yesterday’s high, and a gap down when the opening is lower than yesterday’s low.
Types of gaps and gap fill
There are many types of gaps, however, the three most common are runaway gaps (breakaway gaps), exhaustion gaps, and common gaps.
Common gaps
As the name implies, these are gaps that are “common” and frequent. For example, the S&P 500 opens up or down more or less every day. Most of the days this is just noise and hardly worth to write about (in the news). Typically, the gaps are in the range of plus/minus 0.25%.
Runaway gaps
This gap is often called breakaway gaps. This gap usually leads to higher or lower prices in the same direction of the gap. If it gaps up, we can expect higher prices in the future.
However, it’s easy to explain with hindsight.
Exhaustion gaps
Exhaustion gaps happen after an already extended move in one direction.
For example, if the S&P has had a sudden move over several days upwards, we have a potential exhaustion gap if it one day gaps up more than normal (average).
An exhaustion gap signals the end of the move: it’s the climax.
Do opening gaps get filled?
It depends on the size of the gap and time. Most small gaps are filled the very same day, while bigger gaps need more time (days) to get filled. You can read more about gaps in this article. We have previously also written about unfilled gap.
Some gaps need many many days to fill, some even months, and some never (applies more to single stocks – not indices).
Can you predict a gap opening?
The activity in the market before the official opening is easy to spot. All liquid ETFs and futures contracts indicate where it’s gonna open, of course, it might vary from minute to minute.
You can also use statistics to indicate the probability of a gap up or down opening the next day based on statistics.
Opening gap strategy in the S&P 500 (SPY Gap Fill)
Today I did my personal twist on this strategy. Over the last two months, I’ve been trading a similar strategy, but not exactly the same as the one I’ve tested here.
Here are the details (for long):
- If SPY gaps down lower than -0.15% but higher than -0.6%, go long at the opening print/cross. The reason I use -0.6% as the maximum is that SPY shows a lot less mean reversion if opening lower. To me that makes sense. Usually, there is not that much “news” if SPY opens for example -0.4% down compared to for example 1%. However, if SPY opens more than 1% down it’s a good short, vice versa for long if it opens above 1%.
- Target is 0.75 of the gap. If it opens down -0.5%, the target is 0.375% higher than the fill price. If the target is not reached exit is at the close. No other stops.
- Yesterday’s close must be lower than 0.25 of this formula: (close-low)/(high-low). The reason