Does fading ES gaps work?

In the chatroom last week, one of the members mentioned that when the ES gaps one way or the other (as it did on Friday) there is a tendency for it to fill that gap intraday. I was curious as to how strong that tendency was, so I decided to run a few tests.

For the first test, I implemented a traditional “fade the gap” strategy. If the ES gapped more than 3 points (as measured by the SPY as I have more data for it), I would immediately initiate a position in the opposite direction with a profit target of the previous day’s close. For example, if the market gapped up 3 points, I’d short the open with a profit target at the open - 3 (previous days close) and the reverse for gaps down. I did not use any stops and would exit at close any position that did not hit its profit target.

The results surprised me, a 67% overall win rate, 1.23 Profit Factor, average winner .55%, average loser -.91%.

However, I was suspicious about these results since I did not know how much of the results was impacted by the gap and how much was the fact I was just setting a relatively small profit target out there as a limit order and waiting all day to see if it got hit. To try to test this, I implemented the reverse of the above. If the ES (as measured by the SPY), gapped up 4 points, I’d go long at market and set the profit target at the open +4, trying to make the size of the gap in the direction of the gap. As you can see below, the results were nothing short of horrendous and speak for themselves.

Obviously, the chat room member was correct, there is a _strong_ tendency for the ES to fill in a premarket gap. I’m curious if anyone of our readers have used this type of gap analysis in their trading?

-John