As I update this Substack, I plan to provide all new posts but this is an older Gap Fill post that I think is still very relevant.
Trading the gap in the morning on the ES has been a game changer. It is the one trade that has grown my account each month. I wanted to share gap fill stats and an example from this week.
Again this is more of a personal blog for transparency and holding myself accountable, but for anyone that subscribes I think if you are new to the gap fill trade, it can be a game changer for you too.
What is the gap fill?
The gap is the difference between the 4pm close of the previous day and the 930am open. A gap has to be filled during regular trading hours. A gap remains open until its filled. This can last days, weeks or months.
The Half-Gap occurs in price after the morning open, it is halfway between the 4pm close of the previous day and the 930am open. I use this as a profit target often. Many traders take profits here. I leave a runner then for the full gap.
Basic Rules for ES Gap Fill
Be cautious if:
It’s Option expiration Friday
It’s Rollover Thursday
It’s the 1st trading day of the quarter
We open more than 10 points above or below the gap
Gap Fill Statistics
Monday:
Half Gap fills 76% of time
Full Gap fills 71% of time
Tuesday:
Half Gap fills 75% of time
Full Gap fills 50% of time
Wednesday:
Half Gap fills 87% of time
Full Gap fills 74% of time
Thursday:
Half Gap fills 79% of time
Full Gap fills 67% of time
Friday:
Half Gap fills 83% of time
Full Gap fills 70% of time
Example from 4/6/23
On Wednesday 4/6, if you had shorted around the 8am timeframe, you would have actually passed the gap fill before the market even opened, which at that point you should have taken profit anyways since it acts like a magnet. The 930 bar opened at 4107.75 which was actually less than 10 points from our 4117.25 gap fill. Therefore, you knew that there was still a 87% chance of a half gap fill and a 74% chance of a full gap despite opening up and selling.
The opening bar we sold into. I actually got shook out of my first trade into the gap fill. We made a new low with he 9:45 bar and I drew up a measured move up towards the gap. At this point I saw people at the lows calling for shorts, however knowing the gap was there, that felt like a chase.
Looking at a 5 minute chart now you can see I drew a Measured move up from 945 lows to 4102.
However, I was stopped out of this trade too. But what I want to see is that even though I was stopped out, we did not make a new low, in fact we came 1 tick from the low of 4096.5. That gave me confidence to wait for the next move up which I took.
Keep in mind I’m constantly drawing up moves as price evovles, so I will show you on a minute chart that I got filled at 4100.50 using 3 contracts. My Stop was 4097. I’ll say this was a rather good fill as usually I would wait until the 50% area, however, these moves after a double bottom can be quick so I was ok risking 4 knowing the half gap was at 4012ish.
And in fact, if I had waited, I would have gotten filled at the 50% line a few minutes later. I think it’s better to wait for that area to show participation, and next time I’ll wait.
Back to our 15 minute chart now.
You can see the half gap filled. My methodology is I usually always take my first contract off after 5-6 points just to have a reduced risk trade. For me psychologically it helps to hold onto winners.
I took my 2nd contract off at 4011.50 as it was a point away from the half gap. I like to take off just a bit before everyone else as there is a lot of volatility in the area near a gap fill.
So now, we have the half gap fill filled and we see a ton of profit taking, so much that it breaks through our 61.8 line. I want to point out here that from my observation, this trend is not broken until it dips more than 2 ticks past its 78.6 line. This is really only for the gap fill trade. For whatever reason it has worked. I am not sure if the algos are using this as well, but I have observed this many times. Therefore, you can go for a homerun trade in this context.
Home Run Trade
For the homerun trade, here is what I am looking for.
Use the 61.8 as my entry
The gap fill must be the direction of my trade
Put your stop 3 ticks back from the 78.6 line. It only is broken if more than 2 ticks.
So using the 61.8, you could have added or re-entered at 4103 with a stop of 4000.25. You could also just decide, I want only 2 points of risk and have a standing order at 4002.25. It seems like many times that wick will go halfway between the 61.8 and the 78.6. You can test this out yourself by finding the halfway point between those two lines and having an order there.
We ended up defending this 78.6 line and filled our gap and actually ran up into the 4130s. My last contract was pulled at 4116. I always front run the full gap.
If you traded this day, you’ll know we ran up another 20 pts from here. You could leave a runner for that as well. But I really just wanted to trade the gap and not sit around all day managing further into the trade. I also think this grind higher tends to happen with low volume, low levels of participation going into a holiday, which we were going into Good Friday where the markets were closed. So, knowing that you could have held out for that grind higher.
Remember to use the VX and Bank for confirmation. Bank needs to be green for the ES to go up, and the VX had to be red for us to have confidence in this grind higher.
Unfilled Gaps
I had mention that gaps remain open as long as they were not filled. I do think a large part of the reason we grinded up into the 4130s on Wednesday was because we had an open unfilled gap from earlier int he week at 4130. We did not fill that gap during regular trading hours so you could have used that as a profit target as well if you had held past 4116.
See the red circle above, that was the unfilled gap that we had to be aware of, and it was closed the next day.
Any questions please don’t hesitate to ask!