Technical analysis Chart analysis

Does the Gap Tend to Close?

Elena Berseneva 24 february 2022 168 4

It is apparent to everybody that there often are significant price leaps at the opening of markets on Monday compared the closing price on Friday. Such leaps can be noticed not only after the weekend but also during working days.

 

Such leaps are also called gaps.

 

In this article, we will examine what a gap is. When does it appear? How is it formed? What is the gap's closing? You can find answers to these and many other questions in our article.

 

Many authors write about gaps (price gaps, spaces, or windows), such as: John J. Murphy in his book “Technical Analysis of Futures Markets: Theory and Practice”, Jack D. Schwager in the book «Technical Analysis. Full Course.”, Cornelius Luca in the book “Technical Analysis Applications in the Global Currency Markets”, Steve Nison in the book “Japanese Candlesticks”, Thomas DeMark “A New Science of Technical Analysis”, and others.

 

The common feature of these descriptions is that a gap (a price gap, a space, or a window) means a price severance between two consequent candlesticks.

 

In our research, we define a gap as the difference between the opening market price on the current day and the closing market price on the preceding day.

 

And if there is a great difference between the closing and opening prices, it is followed by a price leap. We can clearly see this in the following image:

Types of gaps and reasons of their appearance:

 

  1. The Inflation Gap, or a breakdown gap, is usually formed by unexpected news of varying importance which creates bullish or bearish sentiments at the moment of their release.
  2. The Continuation Gap, or a “runaway” gap, is caused by a rapid price movement.
  3. The Trading gap, or an ordinary gap, occurs when the instrument is traded as usual but a small gap occurs at the middle or low trade volume.
  4. The Depletion Gap occurs near the end of a big movement. It means that almost everybody who was interested in trading this instrument has already opened positions and the interest has depleted. In this regard, the price can form a big gap at a small trade volume. A big gap with at a low volume indicates that the number of those who want and can trade has significantly decreased.

 

It is commonly believed that gaps tend to close.

 

The gap’s closing is a return of the price chart to the initial level after a certain period of time.  

Hypothesis
To conclusion

Gaps tend to close.

To conclusion

Among traders, it has been argued that all gaps close without exceptions. So, the gap formed with a price discrepancy will be “filled” with the price. And if so, any such price gap can be used in practice and make a profit. 

 

However, it is important to understand that the gap’s closing may occur both imediatelly as well as with a passage of time. Thus, some gaps in quotes remain open for weeks, months, and even years.

 

Statistically, a gap closes in 60-70% of cases of its appearance.

 

Let us check if this is true.

 


Method of event determination 

We will estimate the gap on charts in the following way (based on the example of the upward gap):


  • We search for the price gap at the opening of a new trading day:

Open1 > Close2

 

  • We estimate the value of the price gap, L, in the following way:

L = |Open1 - Close2|

 

  • The minimum value of the gap, L, meets k% of the closing price of the preceding day:

L >= k % * Close2

 

  • If all conditions are met, then we have a gap.



The above-mentioned mechanism helps to spot the upward formation of a gap. For the downward gap, the situation is the reverse.

 

The k parameter determines the gap’s minimum value in % of the closing price of the preceding trading day.

 

In our research, the k parameter is assigned to values: 0.1% (a small gap); 0.2% (a middle gap); 0.3% (a big gap). With growth of the k parameters, the price gap increases.

 

After the gap’s determination, we check when it closes:

  • On the 1st day (the day of gap’s formation);
  • On the 2nd day;
  • On the 3rd day;
  • On the 4th day;
  • On the 5th day.

 

If the formed gap did not close within 5 days, we refer to it as unclosed. 

Data used

For the analysis, we take the following data:

  • 25 currency pairs,
  • 6 commodity futures,
  • 2 US indices,
  • 30 US stocks
  • 58 RF stocks,
  • The RF stock index.


The historical data: the period since 16.06.2005 to 12.06.2019 (14 years).


Timeframe: 1D.


Total: 404 954 values.

Analysis of the results

 

The results are shown in the following tables.

 

The number of gaps and the share of gaps in the sample of market segments:


Gap 0.1 %
Number of candlesticks
Number of gaps
Share of gaps, %
Forex
91250
12122
13
Commodities
21900
10655
49
US indices
7300
1675
23
RF index
3650
1901
52
US stocks
109129
85481
78
RF stocks
171725
137754
80
Total
404954
249588
63


Gap 0.2 %
Number of candlesticks
Number of gaps
Share of gaps, %
Forex
91250
6072
7
Commodities
21900
6912
32
US indices
7300
921
13
RF index
3650
1232
34
US stocks
109129
70904
65
RF stocks
171725
118813
69
Total
404954
204854
52


Gap 0.3 %
Number of candlesticks
Number of gaps
Share of gaps, %
Forex
91250
3669
4
Commodities
21900
4942
23
US indices
7300
552
8
RF index
3650
836
23
US stocks
109129
57992
53
RF stocks
171725
101878
59
Total
404954
169869
43


It should be noted that gaps often appear on the stock charts and rarely on the charts of currency pairs.

 

With an increase of the price gap, the number of gaps and respectively the share of gaps decrease.

 


Let us see the share of closed gaps.

 

The number and share of closed gaps:


Gap 0.1 %
Number of gaps
Closed gaps
Closed gaps, %
Forex
12122
8081
68
Commodities
10655
7317
69
US indices
1675
1109
66
RF index
1901
1186
62
US stocks
85481
55139
64
RF stocks
137754
93658
68
Total
249588
166490
67


Gap 0.2 %
Number of gaps
Closed gaps
Closed gaps, %
Forex
6072
3745
62
Commodities
6912
4536
66
US indices
921
557
60
RF index
1232
723
59
US stocks
70904
44349
63
RF stocks
118813
79772
67
Total
204854
133682
65


Gap 0.3 %
Number of gaps
Closed gaps
Closed gaps, %
Forex
3669
2150
58
Commodities
4942
3101
62
US indices
552
322
58
RF index
836
479
57
US stocks
57992
35194
61
RF stocks
101878
67559
66
Total
169869
108805
63


As we can infer, with an increase of the price gap, the probability of its closing slightly decreases.



The overall share of closed gaps and the share of closed gaps by day:


Gap 0.1 %
Closed gaps, %
1st day
2nd day
3rd day
4th day
5th day
Forex
68
41
29
15
8
6
Commodities
69
55
21
11
7
5
US indices
66
51
24
12
8
6
RF index
62
51
23
13
8
5
US stocks
64
50
24
13
8
6
RF stocks
68
58
20
10
7
5
Overall total
67
52
23
12
7
5


Gap 0.2 %
Closed gaps, %
1st day
2nd day
3rd day
4th day
5th day
Forex
62
31
33
19
10
7
Commodities
66
53
23
11
8
5
US indices
60
43
27
13
10
7
RF index
59
46
23
17
9
5
US stocks
63
47
24
13
9
6
RF stocks
67
57
20
11
7
5
Overall total
65
49
24
13
8
6


Gap 0.3 %
Closed gaps, %
1st day
2nd day
3rd day
4th day
5th day
Forex
58
25
34
22
11
8
Commodities
62
50
24
12
8
5
US indices
58
39
28
14
13
7
RF index
57
43
25
17
9
6
US stocks
61
45
25
14
9
7
RF stocks
66
56
21
11
7
5
Overall total
63
46
25
14
9
6


Regardless of the value of price gaps, the proportion of closed gaps is roughly the same for each of the 5 days following the day of the gap’s formation.

 

On the day of formation, the gap closes: in 52 % of cases for a small price gap, in 49 % of cases for a middle gap, and in 46% of cases for a big gap.

 

Within the next days, the probability of the gap’s closing significantly decreases.

 


If we examine gaps only for weekend days (opening of Monday – closing of Friday), we can see the following results (weekend gaps are highlighted with color):


Gap 0.1 %
Gaps
Closed gaps
Closed gaps, %
Gaps
Closed gaps
Closed gaps, %
Forex
12122
8081
68
3084
2092
67
Commodities
10655
7317
69
2237
1456
65
US indices
1675
1109
66
325
205
63
RF index
1901
1186
62
367
235
64
US stocks
85481
55139
64
15426
9874
64
RF stocks
137754
93658
68
25122
17040
68
Total
249588
166490
67
46561
30902
66


Gap 0.2 %
Gaps
Closed gaps
Closed gaps, %
Gaps
Closed gaps
Closed gaps, %
Forex
6072
3745
62
1385
868
60
Commodities
6912
4536
66
1750
1089
63
US indices
921
557
60
206
119
58
RF index
1232
723
59
240
147
61
US stocks
70904
44349
63
12870
8033
62
RF stocks
118813
79772
67
21887
14658
67
Total
204854
133682
65
38338
24914
64


Gap 0.3 %
Gaps
Closed gaps
Closed gaps, %
Gaps
Closed gaps
Closed gaps, %
Forex
3669
2150
58
748
439
55
Commodities
4942
3101
62
1416
851
60
US indices
552
322
58
130
74
57
RF index
836
479
57
166
94
57
US stocks
57992
35194
61
10628
6453
61
RF stocks
101878
67559
66
18918
12501
66
Total
169869
108805
63
32006
20412
62


The numbers of gaps and, respectively, closed gaps significantly decrease. However, the probability of the Gap’s closing has changed only slightly, by 1 %.

 

So, we can draw the following conclusions.

 

The probability of the gap’s closing with a small gap is 67%, with a middle gap is 65%, and with a big gap is 63%.

 

Such results confirm the conventional belief about gap closing. 


Around half of gaps are closed on the day of their formation.

 

Within the following days, the probability of the gap’s closing significantly decreases.

Conclusion

So, a gap closes in more than 60% of cases which proves the conventional belief about gap closing.


Around half of gaps are closed on the day of their formation.


With an increase of a price gap, the probability of its closing slightly decreases.


A gap often appears on the stock charts and rarely on the charts of currency pairs.


The market segments that perform the best at the gap’s closing are:

  • Commodities
  • RF stocks
  • Forex



The influence of the Gap has been revealed.

Detailed results are shown in the Appendix:

XLSX (0.06 MB)Application to the article 'Does the Gap Tend to Close'.xlsx

Comments

4

Write the comment

Commenting rules
Only authorized users can leave comments. Sign in, please.
Only users with verified email can leave comments. To verify your email, click on the link in the message that has been sent to your email address . Send an email for activation again.

Subscribe to our newsletter and stay up to date with all the news!