Daniels Trading

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Do Gaps Matter?

by | Tips & Strategies

I probably get asked once a month about a gap on a chart and if I think prices will come back and fill the gap. The question is usually followed by the trader quoting the old saying “gaps always get filled.”

Before we can answer this question, we first have to define what constitutes as a gap on a chart. A gap is an area on a chart that has no trades. Below is an example of a gap on a Dec 2013 Corn chart around the $5.50 area:

Do_Gaps_Matter

These gaps usually happen because the markets make a big move during a major report, announcement, news event, etc. Sometimes they happen between the close of one day, the event happens, and then we gap higher or lower on the open of the next day. Other times we have gaps intra-day like during USDA reports in the grain markets.

Now, here are a few points I want to make about gaps and prices

  1. Gaps happen between the market all-time high and all-time low.
  2. All a gap signifies is that we did not trade for certain prices because the market moved too fast in one direction.
  3. If gaps are always filled, can we also infer that if the market traded at any price once, it should trade there again?

I want to really drive home point #3. Let’s say corn has been trading between $3 and $8 for the past few years. What are the odds that the market trades at any price in-between $3 and $8? I would make the argument that over time, the market will trade at all the prices between $3 and $8. The longer the time frame, the more the odds increase that the market will trade every price between $3 and $8. If that is the case, then what is so special about gaps?

When I hear someone say “gaps always get filled”, to me that just means “if the market traded at any price once, it will most likely trade at that price again.” It could be in the next week or in five years. While gaps are an interesting marker on a chart because they signify a market moving event, they can’t predict when a market will trade at those prices again. It could be the next week or it could be ten years; you just don’t know.

So let’s get back to the original questions. Do I think gaps on charts always get filled? On a long enough timeline, I think all prices can eventually trade back to where they once traded before. So yes, I suppose gaps will get filled, but I wouldn’t hold my breath or risk my trading account waiting for it to happen.