Tested strategies Verdict: Could not test

Does gap trading actually work?

By Otto Research 2 min read Tested across 17 years, with real costs

Gap trading acts on the jump between one session's close and the next open, usually on stock indices. The most common rule fades the gap, expecting it to fill; the other trades in its direction, expecting continuation.

The claim is that gaps fill more often than not, or that large gaps signal a trend, depending on who is selling the strategy.

We could not test gap strategies honestly. CFD data around the open does not reliably record the prices a trader could have dealt at, spreads at the open are far wider than the data shows, and fills on a gap are the most uncertain in trading. Any backtest of a gap strategy on retail data is a backtest of prices that were not available.

The reason gap strategies look good in backtests is exactly this: the tester fills the trade at the open print, and the open print is not a tradeable price.

If you trade it anyway, forward test it on a live or cent account, measure the actual fills, and do not believe any historical result.

The ones that survived

See what Otto trades instead.

Most strategies do not survive an honest test. Otto is built on the few that did, and every trade is recorded live on Karnek.