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Do Gaps Matter?

August 6, 2013 by Craig Turner| 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.

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Filed Under: Tips & Strategies

About Craig Turner

Craig Turner is a Senior Broker at Daniels Trading, author of Turner’s Take newsletter, and a Contributing Editor for Grain Analyst. Craig is often quoted in the Wall Street Journal, Reuters, Dow Jones Newswire, Corn & Soybean Digest, and also makes appearances on SiriusXM – Rural Radio Channel 80 providing commentary for the Grain and Livestock markets. Craig has also been featured in FutureSource’s Fast Break series, Futures Magazine Online, and INO.com. Mr. Turner has a Bachelors from the Rensselaer Polytechnic Institute (RPI) where he graduated with honors and has worked at the NYSE and Goldman Sachs. While at Goldman, Craig earned his MBA in the NYU Stern executive program. Learn more about Craig Turner.

Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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Risk Disclosure

This material is conveyed as a solicitation for entering into a derivatives transaction.

This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.

Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.

Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.

You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.

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