Trading the window between the prior close and today's open. Small-to-mid gaps tend to fill intraday (fade), while large news-driven gaps tend to extend (continuation). The sorting axes, numeric rules, the expectancy logic, and the damage of getting it backwards.
The opening gap strategy trades the window (gap) between yesterday's close and today's open.
Orders pile up overnight and get cleared in a burst at the open. The price that jumps away from the prior close in that instant is a lump of the hope and fear that accumulated through the night.
What this strategy harvests splits in two.
One is the fade. Most small gaps rest on thin justification and get pulled back through the session. You position against the gap, collecting the reversion toward the prior close.
The other is continuation. Large gaps backed by strong catalysts — earnings, guidance, takeover news — are not fully priced in a single day, so price keeps extending in the gap's direction. You ride with the gap.
From the same window, one approach is mean reversion, the other trend following. Get the sort wrong, fade into a big news gap, and you can take a fatal hit in a single day. The core of this piece is holding the sorting axes as numbers.
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The three sorting axes, conclusion first.
We make each axis concrete below.
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