What Is a Gap Fill In Stocks?

Last Updated: June 30, 2023

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A gap fill in stocks describes the close of a price gap formed after the end of the regular trading hours (during after-hours and pre-market trading).

But what exactly does that mean? What are the variances, complexities and opportunities arising from gap, gap close (=gap fill), and unclosed gaps?

Key Takeaways

The term gap relates to a price difference between the closing price of the previous day during the regular market hours and the first print (opening price) of todays regular trading hours.
If the price gap gets closed, it’s called a gap fill.
The gap and go pattern is one of the most powerful setups for momentum traders.

Understanding Gap Fill Stocks

The regular trading hours in the U.S. are from 9:30 AM to 4:00 PM EST. Most investors use this time frame to trade stocks. However, there are also extended market hours – the pre market trading hours and after hours. Both are outside the regular trading hours, and the price action during this time is the reason for the so-called gaps, gap fill stocks, and gap strategies.

For example, let’s say that the stock of Apple Inc. (AAPL) closes at 4:oo PM EST on Monday at $150. On Tuesday, the first print during the regular market hours at 9:30 AM EST is $160. In this case, the price gap is $10 (difference between $150 and $160).

The reason for the gap can be general market news, company-related news, or earnings announcements etc.

Now, let’s say after the stock gaps up from $150 at the previous close by $10 at todays open to $160 and then retraces back to $150. In this case, we talk about a gap fill stock because the price difference got closed.

However, the gap does not have to get filled directly on the day after the gap occurs. At any time later, it’s also a gap fill stock when the price gap that appeared gets closed. That can be on any trading volume and independently from the gap type, such as a continuation gap or exhaustion gap.

Gap Up vs. Gap Down

A gap in stocks occurs when there is a discrepancy between the closing price of one candlestick and the opening price of the next.

A “gap up” is when the open of the current candlestick is higher compared to the close of the preceding candlestick, while a “gap down” occurs when a stock closes at one price and opens the next day at a lower price, creating a gap in the chart. Gaps mostly occur on daily charts and only seldom during intraday time frames. Still, a minimal gap is always possible if the last and previous print prices differ.

Gap Trading Strategies

Gap trading strategies encompass purchasing when technical or fundamental factors advocate a gap, fading gaps on the contrary direction, and buying when the price level attains prior support. Traders ought to be mindful of the type of gap, the rationale behind a gap, whether there is a powerful underlying price trend, and whether a gap or fill action is accompanied by augmented volume.

It is preferable to accurately ascertain the direction of a continuation or fill rather than hastily entering into a position and subsequently being disproved by one’s own analysis.

Gap and Go Strategy

The gap and go strategy is used by traders who speculate on further momentum in the direction of a trend. This strategy involves scanning for stocks showing an increase in price compared to the closing price of the prior day during the pre-market.

When those stocks show the strength (e.g., with a 1-minute or 5-minute opening range breakout), the traders go long and trail the stop closely. Below are three more examples of how a gap play can turn out.

Real-Life Example of Gap Fill Trading

Here is a chart from Tesla (TSLA) which highlights 4 different gap variants:

Gap Up & Go: The stock of Tesla gaps up and never looks back. All the short sellers that speculated on the gap fill now get burned, and the stock rises massively due to short covering. Even an ultra-tight stop would have made it possible to massively profit from that up-move.
Gap Up & Gap Close: The Tesla shares gap up, indicating a strong momentum targeting the all-time high. But instead of an ATH, the shares reverse, close the gap and even fall below the previous periods low. This example illustrates how important stop loss orders are.
Gap Down & Go: With the gap down, the TSLA stock is falling from the cliff, and the prices never looked back to it. Again, the gap is that, surprisingly, it gains momentum to the downside, and all are speculating on getting burned in the short term.
Gap Down & Gap Close: After losing about 75% from its high, Tesla shows first strengh. The price gap down and the gap gets closed. Yet, it was not the lowest price in the period, it sill was a bullish indication that the massive downward momentum was nearly at the lowest lows.

As you can see on the chart, it is possible to use gap fill stocks strategies in multiple time frames. This chart is the weekly chart of Tesla (TSLA). This chart intervall is mainly used by swing traders, but the intraday charts work similarly.

Risk Management in Gap Fill Trading

To ensure that each trade has the same $-amount initial risk, the position size gets calculated in R, where 1R=Risk divided by Distance (entry minus stop loss price)

Alternatively, a stop loss can be set at a specific amount away from the entry, or a percentage. Also, some traders use indicators to determine the stop loss.

Diversification

Diversification is essential in gap fill trading as it allows for the risk to be distributed across various stocks and sectors. This can aid in diminishing the total risk of the portfolio. For example:
AAPL gaps up 5%. The trader sells short shares of AAPL with a gap fill profit target
AMZN gaps down 5%, the traders buy shares of AMZN with a gap fill profit target

This way, overall market directon has only a slight impact on the overall position, while both strategies speculate on a gap close. The best case is that both stocks close the gap and become gap fill stocks.

Summary

Exhaustion gaps, continuation gaps, gap ups and gap downs, and trading gap fill stocks can be profitable if done correctly. However, the most important thing is that gaps fill most often but not always. So, speculating on guaranteed gap fills is surely not the best strategy.

When a gap occurs, it is most often due to company news and trade gaps either for a continuation of momentum into the gap direction or speculation in a gap fill is reasonable as long risk management is considered.

Automated gap fill trading of stocks is a good method to diversify when traded intraday, while investors can also trade gap strategies based on higher time frames such as the monthly or weekly chart.

FAQ

Is gap fill bullish or bearish?

If a gap up gets filled, the market sentiment is bearish because the upward momentum does not persist. In contrast, the market sentiment is bullish if the gap down gets filled because the downward momentum does not persist.

How do you trade with gap filling strategy?

Day traders often use the 1-minute opening range breakout to determine the sentiment of the gap. If a stock gaps up and the price of the opening range sees a breakout to the upside, its bullish, while breaking the opening range price low to the downside is considered bearish.