CME Gaps for Bitcoin Price Fill over 95% of the Time: Research
CME Gaps are popular topics that frequently get talked about in the crypto market, which usually has seen Bitcoin dumping.
These Gaps occur because unlike the Bitcoin market that works around the clock, no matter if it's the weekend or a national holiday, the regulated market doesn't. Bitcoin is never down. However, the regulated market, CME’s market doesn’t share the same 24/7 global trading hours of most other crypto exchanges.
During this period, no trades are conducted which causes “gaps” to form on CME Bitcoin price charts which rarely form on other exchanges.
What's' the best strategy to trade the CME Gap
Talking about this apparent anomaly, Market Science, a research service released a CME Gap Study to analyze its effects.
The firm found that there is no clear reason for what caused such a phenomenon to occur, though it’s likely it originated in equity and fixed income markets, “where vastly diminished overnight liquidity effectively closes them” as a result instruments in the market open at different prices than they close at.
In the Bitcoin market, gap filling is one of the most popular strategies around CME downtime. And since the launch of Bitcoin futures in Dec. 2017, these gaps filled 95% of the time. In 77% of these cases, Bitcoin made a retracement in the subsequent week.
“Virtually all the moves are actually retraced before next Friday market close,” it said.
But it doesn’t mean trading for that gap fill with leverage is the strategy to follow. Market Science says what one needs to do is to open a trade in the opposite direction of the weekend gap upon the CME market open and then close at the gap open level if touched. In case not touched, hold until either the next CME Friday market close or the next CME Sunday market open.
Fading the gaps have a negative edge
However, some gaps don't fill for an entire year but these are unprofitable most of the time that gaps don't fill. The losses, in this case, are pretty significant, “offsetting the high strike rate for gaps closing.”
Fading the gaps it said has a “significant” negative edge in the 1-2 days following the CME open. The better strategy here would be trade in the direction of the gap immediately following their formation.
However, this analysis didn’t take into account the magnitude of each gap. But even taking that into account, while it produces improved risk-adjusted returns slightly, it is still not worth trading.
On comparing the data from crypto derivatives data BitMEX to that of CME, the report found, “Average gap size actually decreased slightly since the CME launched its futures products.” This difference is “more significant” when accounting for volatility, 25% smaller in relative terms after the CME opened.
As for whether the impact CME future gaps have had on XTPUSD price action is significant, the research states that’s a no.