Unfilled Gap In Trading? – (Gap Up Gap Down) | Backtest And Strategies

Last Updated on August 4, 2022

What is an unfilled gap 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?

An unfilled gap in trading 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.

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:

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:

unfilled gap in tradingIt’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:

unfilled gap to fillThe 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 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 weekday matter?

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 inside day. An inside day is when all the price action is below yesterday’s high and low (volatility goes down). The strategy is as follows (using SPY 1993 – 2021):

  1. Yesterday was an unfilled gap down day.
  2. Today is an inside day.
  3. If 1 and 2 are true, we enter at the close.
  4. We exit after 5 days.

This pattern is very rare and has only happened 25 times in the S&P 500 since 1993. By using a time exit we get the following results:

As you can see, the risk/reward seems good (look at the column called profit factor). The negative is the few occasions of the pattern.

Unfilled gap down and low RSI

A gap can be labeled an “exhaustion” gap if it happens after a move down. Let’s backtest the following hypothesis (using SPY 1993 – 2021):

  1. Today is an unfilled gap down day.
  2. The two-day RSI is below 30.
  3. If both 1 and 2 are true, then enter at the close.
  4. We exit after x days.

This has returned the following results with a holding period from 1 to 20 days (column 2 showing the result with an exit after x days):

If we flip the criteria, ie. go short, doesn’t work.

Gap down (exhaustion gap) after several down days:

We backtest the following (using SPY 1993 – 2021):

  1. Two days ago was a down day (close to close – not necessarily unfilled gap).
  2. Yesterday was a down day (close to close – not necessarily unfilled gap).
  3. Today is an unfilled gap down.
  4. If 1, 2, and 3 are true, go long at the close.
  5. Exit after x days.

This has returned the following results with a holding period from 1 to 20 days (column 2 showing the result with an exit after x days):

Summary: What is an unfilled gap in trading? Are unfilled gaps profitable?

An unfilled gap happens when all the price action today is either lower than yesterday’s low (gap down) or higher than yesterday’s high (gap up). Our backtests indicate they are not tradeable on their own, but they can be improved by adding additional variable(s).

An unfilled gap down works well as a mean-reverting indicator on the S&P 500, especially coupled with an inside day. However, there are few trades and you are probably better off using other mean-reverting strategies.

To get more trades you can change the definition of an unfilled gap: you have an unfilled gap down when today’s high is below yesterday’s close, and you have an unfilled gap up when today’s low is above yesterday’s high.

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