Trading for Gap Fill a Legitimate Strategy?

Sunday, January 10, 2010

Hat tip Trade Flight Plan via Slope of Hope
2009 ES Gap Fill Summary

Many traders regard the gap fill on the E-mini S&P 500 futures contract (designated on many trading platforms by ticker symbol root ES) as one of the highest probability trades each trading day.

Well, let’s see if the statistics held true in 2009. The gap fill is defined by price action that touches or breaks through the closing price of the previous trading day.

Since many traders regard the 4:00PM Eastern Time close as the gap to be filled, we’ll use the 4:00PM closing time for our analysis. Many trading platforms show the ES closing prices based on the 4:15PM session close, so custom tweaks are required to show the previous trading day’s 4:00PM closing price.

In this analysis, we track the number of trading days the ES filled its gap, or at least touched the 4:00 closing price from the previous trading day. We also observe the hourly time slot the ES first fills its gap on gap fill days.
You can see that based on Trade Flight Plan's study, trading for a gap fill is a legitimate strategy with 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.

Over at we often look for opening gap fills within the first hour. We preach that 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 shows the effectiveness of the T3Live strategy throughout 2009. I will continue using this strategy throughout 2010.
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