A gap is when a stock opens away from where it closed the day before. The gap fade bets the price will come back to yesterday's close, which traders call filling the gap. When the open is at least 0.3 percent away from yesterday's close, it trades back toward that close and takes its profit there. The stop is a move of twice the gap further away from the open. It takes one trade a day and closes out five minutes before the bell.
Gaps fill often, so the fade wins often. The losses come on the days the gap keeps running, and one of those can undo many small wins.
It made money on four of the five stocks, lost on QQQ, and trailed holding on all five.
In the table, the biggest drop is the most the account fell from a high point before it recovered.
| Stock | With the strategy | Just holding | Trades | Biggest drop | Backtest |
|---|---|---|---|---|---|
| SPY | $10,016 (+0.2%) | $14,640 (+46.4%) | 303 | -6.8% | See the backtest |
| QQQ | $9,495 (-5.0%) | $16,578 (+65.8%) | 377 | -13.9% | See the backtest |
| IWM | $11,871 (+18.7%) | $13,462 (+34.6%) | 413 | -11.5% | See the backtest |
| AAPL | $13,487 (+34.9%) | $19,418 (+94.2%) | 365 | -9.3% | See the backtest |
| MSFT | $10,772 (+7.7%) | $12,112 (+21.1%) | 394 | -19.2% | See the backtest |
Read the study behind this strategy
How we tested
We ran the textbook rules on 5-minute candles on SPY, QQQ, IWM, Apple and Microsoft from Mar 26, 2024 to the end of last month, in the same Backtest tab you can use. Every strategy on this site starts on the same day, the first day the slowest of them, the golden cross, could trade.
Every test starts with $10,000 and puts the whole balance into each trade, with no borrowed money. Costs are the tester's defaults for stocks: half a cent a share in commission and a cent of slippage on every fill. Slippage is the gap between the price you wanted and the price you got.
"Just holding" buys the same stock at the open on the first day of the test and keeps it to the end.
Questions
Does fading the gap beat buying and holding?
No. It didn't beat just holding on any of the five stocks after costs, even though it made money on four of them.
Don't most gaps fill?
Many do, and our gap study counts how often. A fill isn't the same as a profit, though. Every trade pays costs, and the days the gap keeps running hit the stop.
Can I test it on a different stock?
Yes. Press "Try it yourself" to open the Backtest tab with the gap fill fade already loaded, then change the stock. Without a paid plan you can reach less history than we used, so your numbers can differ.