Mean Reversion
Overnight Gap Fade
A stock opens away from where it closed the day before, and the trade bets that price spends the session filling that gap back toward the prior close instead of running further away from it.
Watch the session race to fill the gap, or not
Pick a gap scenario, then press play. The track below is the trading session itself, 9:30 to 4:00, and the marker moves across it in real time as the price plays out bar by bar. The dashed line on the chart is the prior close, the fill target. Watch whether price gets there before the session runs out.
How it works
- The fill target is fixed before the bell rings: yesterday's close. Gap size is the percent difference between that price and the print at the open, nothing more exotic than that.
- A fill means price traded back to or through that level at some point during the session. It doesn't need to close there, and it doesn't need to stay there once it arrives, the race above stops the instant price first touches the target.
- Smaller gaps fill more often than larger ones. A half-percent gap is often overnight noise working itself out in the first hour. A five-percent gap usually reflects something that actually changed, and the market has less reason to erase it.
- A gap that runs counter to the recent trend fills more often than one that extends it. A counter-trend gap looks more like a reactive overshoot with room to snap back. A with-trend gap looks more like the market repricing further in the direction it was already headed.
Where this breaks
A large gap in the direction of a real trend can spend the whole session opening, not closing
Run the "large gap, with the trend" preset a few times in a row. Price frequently spends the entire session drifting further from the prior close instead of toward it, because a gap like that is often driven by real new information (earnings, guidance, a macro surprise) landing on top of a move that was already underway, not by an overnight overreaction with nothing behind it. Fading that kind of gap on size alone puts the position squarely against both the news and the trend at the same time, with the clock running out and nothing pulling price back toward the fill target.