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1999issue C111-7

Opening-gap same-day fade rules

The historical workflow takes a same-session position after an opening gap from the prior close and unwinds it at that day's close. A cutoff, a pair of on-open limits, and a close-of-day unwind turn the fade into one testable procedure.

  • The procedure takes a same-session position after an opening gap from the prior close and unwinds that position at the same day's close, without conditioning the exit on whether the trade is ahead or behind.
  • The intended setup is a fade of an unusually large open: buy after a gap down, sell after a gap up, on the premise that an unwarranted open should begin to correct within that session.
  • Execution is a pair of on-open limit orders placed before the open, one above and one below the prior close at the chosen gap distance, so that at most one side typically fills.
  • A cutoff decides which opens are large enough to trade. On one name, most opens clustered near the prior close, and a 1% cutoff would have left about 85% of opens untraded.
Entries in this reading3 entries
Current trackGap trading24 readingsOpening range breakout35 readingsRule-based entry292 readings

The same-session fade

The procedure takes a same-session position after an opening gap from the prior close and unwinds that position at the same day's close, without conditioning the exit on whether the trade is ahead or behind.

The intended setup is a fade of an unusually large open: buy after a gap down, sell after a gap up, on the premise that an unwarranted open should begin to correct within that session.

The cutoff that decides whether to act

On one name over one year, most opens clustered near the prior close. 212 of 250 observations fell between -1.09% and 1.15%, so a 1% cutoff would have left about 85% of opens untraded.

Widening that same name's no-trade band to two standard deviations left 12 abnormal opens as candidate trades.

How the entry fires

Execution is specified as a pair of on-open limit orders placed before the open, one above and one below the prior close at the chosen gap distance, so that at most one side typically fills and both cancel if the open falls between them.

The close-of-day unwind

The position is unwound at the same day's close, without conditioning the exit on whether the trade is ahead or behind.

What the tabulated counts recorded

On that name, a one-share open-to-close tally after unusual gaps recorded 18 down gaps with 9 profitable longs and 20 up gaps with 13 profitable shorts.

A 2% gap threshold, applied one share per name and held to the close, produced 413 positions in the tabulated basket, of which 296 were long and 225 were short.

Net exposure, defined as the sum of the open positions, stayed near zero on average and flipped sign, so the book was not described as staying one-sided for long stretches.

How the write-up framed the result

The write-up treats the procedure as only modestly profitable in the test and suitable mainly where capital is adequate and trading costs are low.

It lists tweaks such as separate long and short cutoffs, stock-specific levels, volatility-scaled gaps, size scaled to gap size, and profitability stops.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
3 of 20 in the Gap trading track
19991-3 pp.Next on Gap tradingEvaluating same-session opening-gap rulesOpening-gap is the percentage distance between the current session open and the prior session close, computed as 100 times the current open minus the prior close, divided by the prior close.
All readings on this track · 20 readings
  1. 1988Constructing short-horizon gap and trailing-stop rules
  2. 1996Constructing closed rules for spikes, time stops and gap failures
  3. 1999Opening-gap same-day fade rules
  4. 1999Evaluating same-session opening-gap rules
  5. 1999Constructing mechanical gap-fade entry and exit rules
  6. 2000Constructing opening-gap continuation entry and exit rules
  7. 2000Gap types as trade hypotheses
  8. 2003One-day fade-the-gap rules remain unfinished across market climates
  9. 2003Gap and pivot entry rules with stops written before the fill
  10. 2007Evaluating gap and lap opens against short-horizon baselines
  11. 2007Evaluating same-day gap rules across price, momentum, and weekday
  12. 2011Session gaps as a fade-or-follow drill
  13. 2015Testing gap continuation breakouts as one procedure
  14. 2015Downside exhaustion gaps as a ten-session fade procedure
  15. 2016Constructing a gap-fill long as one entry and exit checklist
  16. 2016Gap-reversal entry and trailing-stop rules
  17. 2016Constructing late entries from serial uptrend gaps
  18. 2017Premarket gap permission with cup breakouts and one tight trail
  19. 2018Inside-range gap breakout entry and stop rules
  20. 2020Closing-range breakout after a downside gap
By fieldEntry and exit rules327 readingsBy year199989 readings
All 24 readings tagged Gap trading
Also on Gap trading5 readings
1996Constructing closed rules for spikes, time stops and gap failures1999Constructing mechanical gap-fade entry and exit rules1999Evaluating same-session opening-gap rules2003Gap and pivot entry rules with stops written before the fill2015Downside exhaustion gaps as a ten-session fade procedure