Unfilled Gap Trading Strategies – Gap Up / Gap Down (Backtest)

An unfilled gap trading strategy happens when all the price action today is either lower than yesterday’s low (gap down) or higher than yesterday’s high (gap up). They are also profitable if we base our buy signals on additional criteria.

We do many backtests to measure profitability, and we give you some ideas on how you can take advantage of them. We only backtest the S&P 500.

What is an unfilled gap trading strategy in trading? There are many traders trading solely on gaps because most of the time a gap up or down means increased volatility, and this equals more prey for good traders. In this article, we look at some statistics about unfilled gaps. Is it possible to make money in trading if you trade gaps?

Most traders know what a gap is, but an “unfilled” gap might be lesser-known. This article looks at unfilled gaps in trading.

What is a gap in trading?

Gaps normally happen overnight when the market is closed. When the market opens again the next day, news and other noise may have made the price go up or down.

Some markets have more frequent gaps. This is typical in markets that have huge movements between the official/regular trading hours and the open the next day, for example, gold. The stock market has fewer gaps.

We recommend our previous article about gaps if you want to read more about gaps:

• Gap trading strategies (How to trade gaps with backtested examples)

What is an unfilled gap in trading?

If the gap is not filled during the first day we label it as unfilled. For example, if the S&P 500 opens below yesterday’s low and never trade above yesterday’s low, it’s an unfilled gap. Here is an example in the S&P 500:

It’s an unfilled gap for three days (the gap fills on the third day after the gap down).

Other versions of unfilled gaps in trading

Please be aware that other traders might define an unfilled gap differently. Some traders consider the gap unfilled as long as today’s high is lower than yesterday’s close (an unfilled gap down). Opposite, we have an unfilled gap up when today’s low is above yesterday’s close.

This definition of an unfilled gap leads to many more trades or signals. Obviously, more trades might lead to other results than we have in this article. There are no exact answers in trading, and you might want to backtest other versions yourself.

How long does it take for an unfilled gap to fill?

This is an example of a filled gap:

The S&P 500 gaps down, but the gap is filled on the next day after the gap down.

The gap is filled when we see trades between the low and high of the two days that formed the gap (on a gap down – opposite on a gap up). On day 3 of the formation, we see that the gap is filled.

Unfilled Gap Trading Strategy Backtest (Up and Down)

Let’s backtest by using the ES contract (S&P 500) from August 2010 until August 2021.

• There have been 133 unfilled gaps down, about 5% of the bars
• 30 were filled the first day after the gap down
• 28 were filled on the second day after the gap down
• 13 were filled on the third day after the gap down
• 7 were filled on the fourth day after the gap down
• 6 were filled on the fifth day after the gap down

63% of the unfilled gaps down were filled within five days.

How long does it take for the unfilled up gaps to fill?

• There have been 278 unfilled gaps up, about 10% of the bars
• 57 were filled the first day after the unfilled gap up
• 43 were filled on the second day after the gap up
• 24 were filled on the third day after the gap up
• 13 were filled on the fourth day after the gap up
• 6 were filled on the fifth day after the gap up

51% of the unfilled gaps up were filled within the first five days.

Perhaps as expected, we see that gaps up take longer to fill. The reason is, of course, the upward bias in the stock market.

How profitable is an unfilled gap?

We backtest the following hypothesis: we enter at the close of an unfilled gap down and we sell x days later at the close. This is the result:

Column 2 shows the bars/number of days in the position. The strategy is better the longer you hold, simply because of the upward drift in the market.

If we do the opposite and buy on an unfilled gap up, we get these results:

Again, a longer holding period increases the profits because of the upward drift.

The results show that a gap up, in general, performs better than a gap down. But, unfortunately, none of these strategies are tradeable, in our opinion.

Let’s return to a gap down.

If we implement a ten-day RSI filter we see that the best gaps down happen when the RSI value is below 50. This also increases the average gain per trade and the profit factor:

Does Day Of Week Matter In Gap Trading Strategies?

Most gaps down happen on Mondays. But it turns out the best gaps down are best on Tuesdays and Wednesdays (to enter at the close these days). Please also read our article called Turnaround Tuesday.

Gaps up work reasonably well all days except Wednesdays.

Unfilled gap down and inside day

There are many twists you can make to an unfilled gap. Below we present one of an unfilled gap down followed by an