Gap close theory

[rossored]

Can someone explain the reasoning behind the theory that all gaps must be closed?

I notice how often this happens on the US majors (YM/NQ/ES) and I often exploit it...I just wondered if this is something that happens on stocks, too, and if there is any explanation behind it at all??

Merry Xmas btw

RR

 

[Skimbleshanks]

It's supposed to be that all gaps eventually get closed - even if they don't get closed on the day they are formed. Seems to work, but there's no indication of exactly how long you would have to wait.

There are lots of different types of gaps - some stocks gap as a matter of course, others do so periodically and these are the ones to pay attention to.

Ages ago (in 2000) I knew someone who went back over all the old charts and pinpointed where the unfilled gaps were during the bull market - so he knew where each stock would be likely to bottom during the subsequent bear market. He was right, of course, but it seemed far too much work to me!

 

[Glenn]

Gaps usually occur because of a reported event and the reactions to it.
Whether the closing of the gap is the result of people exploiting the gap or simply a return to common sense is impossible to say.
If there was a reason and it was in the public domain then we'd all be squillionarries or there'd be no more gaps 🙂

But like everything else, if you can exploit it and manage your position then that's all you need to know.
Have a look at the 2 pages on this link for some ideas.
www.stockcharts.com/education/TradingStrategies/gapStrategies1.html

Glenn

 

[kevin546]

ross

for what it is worth my take on gaps which are very good for trading is that the more business the market makes the better they do. So if we get a move up people buy and when it goes back down they sell. Others come back in and more buying is seen as the orders increase and more money for the businesses within the market trade.

A simplistic view I grant you but I have not yet been given a better example.

 

[kevinmcm]

rossored - there is nothing to say that they will be filled but from following gaps over the last 6 months I can tell you that around 90% of gaps are filled within a short time, a few weeks to a few months. They will be part of my trading strategy for next year. I am happy that I can use the gaps to my advantage.

Here is a list of gaps I posted back in September http://www.tradersoftware.biz/gaps/gap.htm On that list SSE & NXT have also closed their gaps.

and the current list made up on 24th Dec
http://www.tradersoftware.biz/gaps/g24122003.htm EMG covered on Wednesday.


Kevin.

 

[kevin546]

Kevin

I find this concept interesting, have you considered trying it on the FTSE index in addition to FTSE 100 companies.

What is your entry signal, a price just below the top or some measuring tool to show the price has gone to far to quickly.

Are you using the original gap position to close.

I have looked at this but only from an intraday perspective and it can be quite profitable. But my experience is restricted to the FTSE index as I trade this exclusively.

Kevin

 

[kevin546]

Kevinmcm

I have been trying to follow your list but I must be missing something. When you get time could you expand you explanation for a simpleton like me. Maybe you could use emg as an example as it met you criteria on Wednesday. I have had a look at the 10 day 1 hour chart but for the moment I cannot see it. Must still be under the influence.

 

[rossored]

Thanks for your replies everyone 😀

 

[kevinmcm]

kevin546 - First of all it appears that we are using different charting facilities. I use http://www.bigcharts.com when analysing gaps.

My EOD data has the following figures O/H/L/C :
23/12 - 1460 1460 1432 1445
24/12 - 1408 1462 1408 1454

Which doesnt agree with Bigcharts.

Another set of figs I have is,
23/12 - 1460 1460 1432 1445
24/12 - 1430 1462 1430 1454

Maybe these figs are market hour trades and dont cover auction prices etc ?

The point is that EMG did gap down on Wednesday morning. I use the usual signals (MACD/Slow stoch/RSI) to pick and entry point and usually have an exit point about 1 point away from the gap closure as it will often approach but not always completely cover the gap first time.

The gaps I posted are, in general, intended as longer term trades but look out for gaps of a few points which appear on a daily chart as they will often get covered same day or intraday.

The list if for guidance as much as anything and intended to give traders a start instead of doing all the donkey work themselves.

Hope that helps.

Kevin.

 

[kevin546]

kevinmcm

Thanks for explanation.