Strategies
Gap Trading: Playing the Open for Consistent Edge
Gaps occur when price opens significantly above or below the prior close — understanding gap types and which gaps fill versus which extend is a consistent source of trading edge.
Key rules
- Breakaway gaps from consolidation zones on high volume are directional signals — trade with the gap, not against it
- Common gaps fill — trade the reversion with a stop just beyond the gap open
- Exhaustion gaps identify trend exhaustion — the rapid fill of an exhaustion gap is a reversal signal
- Gap and Go works best in the first 30 minutes of the session with high pre-market volume confirming the catalyst
- Never fade a breakaway gap on the first day — wait for confirmed exhaustion (typically 3–5 days of extension) before reversing
A gap occurs when a stock or index opens significantly above or below its prior session's closing price, creating a 'void' on the chart with no trading. Gaps occur due to overnight news, earnings releases, economic data, or simply the natural imbalance between buy and sell orders at the open.
**The Four Types of Gaps**
**Common Gap**: Occurs frequently in a sideways market with no specific catalyst. Usually fills quickly — not traded directionally. The market fills it because there is no sustained imbalance.
**Breakaway Gap**: Occurs when price gaps out of a consolidation zone or chart pattern on high volume. This gap validates the breakout — it is a strong directional signal. Breakaway gaps rarely fill quickly and often mark the beginning of extended moves.
**Runaway / Measuring Gap**: Occurs in the middle of a strong trend. Confirms the trend is healthy. The 'measuring' name comes from the observation that the gap often appears at the midpoint of the total trend move — used to project the target.
**Exhaustion Gap**: Occurs near the end of a trend — a final, often high-volume gap in the trend direction before reversal. Characterised by the price being very extended, overvalued/oversold indicators, and a rapid fill (close of the gap within 1–3 days). Signals the trend is near exhaustion.
**The Gap and Go Strategy** Pre-market: identify stocks gapping up 3%+ on earnings beats, product news, or analyst upgrades. Confirm price above pre-market range highs. At market open, buy the first pullback to a pre-market level (VWAP or prior resistance) with volume confirmation. Target: prior resistance or measured move.
**Gap Fill Strategy** Common gaps fill most of the time. Breakaway and runaway gaps rarely fill within the same week. After identifying a common gap, trade the reversion toward the fill with a tight stop on the other side of the gap open.