What Does It Mean to Fill the Gap in Stocks?

Gap fill stocks are stocks that have to retrace to a previous candle that’s opened higher or lower than the current price. It’s been said all gaps must fill. When that happens is anyone’s guess, however. But if a stock gaps up, chances are it’ll consolidate at some point to “fill the gap”.

What’s a Gap Fill?

Gaps in a price chart are areas where the price pattern quickly jumps up or down for any asset with little trading volume (two adjacent candles where first’s closing price and second’s opening prices significantly different.) In volatile markets, we as traders can benefit from these large positive and negative jumps in an asset’s price.

But we have to recognize those and turn them into opportunities. Gaps are filled when they return to their previous levels. We’ll go over what’s happening with gap fill stocks. And how you can profit from gaps and their fills. 

Gaps Introduction

Gaps are a result of fundamental or technical factors. For example, the most common reason gaps appear is when there is an imbalance between supply and demand. Up at the open, if there’s aggressive buying or down with selling that outpaces the current supply at the previous closing price. 

Gaps can also occur due to the overnight sentiment buzz, like reaching a new high in the previous session. The buzz then pushes a stock higher at its open. Or there’s big after-hours news that changes the overnight sentiment. Gap fill stocks can also form if a large player(smart money) attempts to pass a support or resistance level. 

Gap Fill Stocks

Four Gap Types

  • Common gaps– an undefined area where the price has gaped
  • Continuation gaps- form in the middle of a price pattern signaling an influx of buyers or sellers who agree about the asset’s future price direction and will continue that direction; these are also known as runaway gaps
  • Breakaway gaps– form at the end of a price pattern, signaling the beginning of a new trend
  • Exhaustion gaps– form near the end of a price pattern, signaling an attempt to push past support or resistance

Do Stock Gaps Always Fill?

Gap fill stocks are considered “filled” when their price retreats to the original pre-gap level. Will gap fill stocks happen every time? Mostly they do. But there are outliers. Sometimes low volatility penny stocks will never fill a gap.

Filling that happens on the same trading day is called “fading” and can be due to some overnight news that causes a gap but then additional news kills the gap that was created, or cooler heads prevailed returning the price.  Filling usually happens for one of three reasons:

  • Support and resistance– The asset’s price is pushed back from technical resistance
  • Over Optimism/Pessimism– There is a correction after irrational exuberance
  • Exhaustion Gaps- This price pattern is the most likely to get filled as they signal the end of a trend.  The other types of gaps usually indicate a continuing direction

Trading of gap fill stocks is a method to gain most during the earnings season where good numbers or bad numbers can have an overreaction. 

Gap Fill Stocks Strategies

There are several gap fill stocks strategies we traders can take advantage of gaps, and a few of these strategies are more popular than others.  

  • Assuming a potential gap– Some traders either buy or sell when fundamental or technical factors favor a gap on the following trading day.  For example, selling in afterhours trading when a surprise negative earnings report is released, with the hope that a gap is formed the following trading day.
  • Trading highly liquid or illiquid positions- buying or selling positions when price movements begin assuming a good gap will continue.  For example a gap has formed upward with minimal liquidity and little resistance above.  This would follow slightly behind a trader that opened a position on the assumed gap at the beginning of a price movement.
  • Filling/Fading- This is where you find a gap that has formed but hits a brick wall (either a top or bottom) due to weakening or a technical analyst play.  For example, an upward gap was formed due to speculation of an upcoming announcement, but traders will cause a fade of the gap by shorting the stock.  and using technical analysis. 
  • Post fill buy/sell- This is when a trader will follow the gap filling and when the gap is successfully filled they will buy or sell in the opposite direction when the price reaches any prior support or resistance of before the gap. 

Gap Fill Strategies

Let’s look at a general gap fill stocks trading example, then a more difficult one. 

With an up gap the gap then acts as a support level for any pullback.  A lighter volume pullback indicates there is not enough energy to surpass the gap and the gap becomes a support for a bullish buy. 

How the trade works:

  1. Identify an up price gap
  2. Wait for the pull back to the prior days close and fill the gap(usually a fade).
  3. Buy at this point with stop order

There Is a Second Type of Pull Back

  1. Price gap formed is just above the previous day’s low (or above the high), and then a strong pin bar formed which fills the gap. The volume should be high on the pin bar.
  2. A second price gap up/down and then a retrace filling the gap, taking more than two candles with decreasing volume
  3. Look for a sign of strength/weakness where you will enter the position
  4. Price should not close inside the previous day in any five-minute candle
  5. You then place a stop below/above the low/high of the candlestick.
Gap Fill Stocks

Gap Fill Stocks Trading Key Points

  • Breakaway gap stock fills should have high volume associated with them and exhaustion gaps should have low volume so look for it.
    • Exhaustion gaps and continuation gaps are in opposite direction so make sure to identify them correctly.
    • When a stock starts to fill a gap is rarely stops because of a lack of support/resistance.
    • Retail investors (dumb money) usually exhibit irrational exuberance but smart money (institutional investors) may use this for their own gain, so look for the indicators and take positions on a break not before.

Summary

When earnings are coming out or news is a surprise, you can take advantage of a gap fill stocks trading strategy. Gap filling is an easy-to-identify pattern that can be quite profitable.  As always never put at risk more than you can lose and good luck with all your trades. 

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