Gaps are one of the most significant technical events in the market. When a stock opens significantly higher or lower than the previous close, it creates opportunities that skilled day traders can exploit. This guide covers the major gap trading strategies and how to apply them in your trading.
What is a Gap?
A gap occurs when a stock opens at a price significantly different from its previous closing price, creating a visible void on the chart. Gaps happen due to overnight news, earnings announcements, analyst upgrades/downgrades, or changes in market sentiment.
Gap types by size:
- Small gap: Less than 2% - Often fills during the day
- Medium gap: 2-5% - May or may not fill
- Large gap: Over 5% - Often signals a new trend
Types of Gaps
1. Common Gap
Small gaps that occur without significant news. These gaps frequently fill (price returns to the previous close) during the same trading session.
2. Breakaway Gap
Gaps that occur as price breaks out of a consolidation pattern or key level. These gaps often signal the start of a new trend and may not fill for days or weeks.
3. Continuation Gap
Gaps that occur in the middle of an existing trend, confirming the trend's strength. Also called runaway gaps.
4. Exhaustion Gap
Gaps that occur near the end of a trend, often on high volume. These typically fill quickly as the trend reverses.
Gap Trading Strategies
Strategy 1: Gap and Go
The gap and go strategy trades in the direction of the gap, expecting momentum to continue. This works best with strong gaps on significant catalysts.
Gap and Go Setup
Stock gaps up 8% on earnings beat:
- Pre-market: Stock consolidates near highs, holding gains
- Volume: Heavy pre-market volume confirms interest
- Entry: Buy break of pre-market high after 9:30
- Stop: Below pre-market consolidation low
- Target: Measured move or key resistance level
Gap and Go Checklist
- Gap is at least 4% with a clear catalyst (news, earnings)
- Pre-market volume is 2x average or higher
- Stock is holding near highs, not fading
- Relative strength to market (gapping more than SPY)
- No major resistance immediately above
Strategy 2: Gap Fill
The gap fill strategy anticipates that price will return to fill the gap (reach the previous close). This works best with small to medium gaps on low-quality catalysts.
Gap Fill Setup
Stock gaps down 3% on minor analyst downgrade:
- Catalyst: Weak - just an analyst opinion
- Pre-market: Already starting to bounce
- Entry: Buy when price shows reversal pattern at support
- Stop: Below the morning low
- Target: Previous day's close (gap fill)
Gap Fill Checklist
- Gap is small to medium sized (1-4%)
- No significant catalyst or catalyst is overblown
- Price finds support at a technical level
- Reversal candlestick pattern forms
- Market conditions support the reversal direction
Strategy 3: Gap Fade
The gap fade trades against the gap direction, expecting the gap to be excessive. This is a counter-trend strategy requiring careful risk management.
Gap Fade Setup
Stock gaps up 12% on hype (no fundamental change):
- Catalyst: Social media hype, pump
- Warning signs: No earnings, no real news
- Entry: Short after first push fails to hold
- Stop: Above morning highs (tight)
- Target: 50% retracement of gap or prior support
Gap Fade Warning Signs
- Gap is on hype, not fundamental news
- Stock is already extended from moving averages
- Sector is weak while stock gaps strong
- Volume decreases as price pushes higher
Gap Trading Rules
Pre-Market Analysis
- Identify the catalyst: Why did the stock gap?
- Assess the strength: Is the catalyst significant enough to sustain the gap?
- Check the chart: Where is the gap relative to support/resistance?
- Monitor pre-market action: Is the stock holding or fading?
- Plan your strategy: Gap and go, fill, or fade?
Position Sizing
Gaps are volatile. Reduce position size compared to normal setups:
- Use 50-75% of normal position size
- Account for wider stops due to volatility
- Scale in rather than taking full position at once
Time-Based Rules
- First 15 minutes: Most volatile, experienced traders only
- 15-30 minutes: Initial direction often establishes
- After 30 minutes: Easier to identify which gaps will fill vs continue
Pro tip: Many professional gap traders wait until 9:45 or 10:00 AM before entering. This lets the initial chaos settle and provides clearer signals about the gap's true character.
Gap Statistics to Know
- Approximately 70% of small gaps fill within the same day
- Large gaps (over 5%) fill only about 30% of the time on day one
- Gaps on high volume are more likely to continue than reverse
- Gap ups into resistance tend to fade; gap downs into support tend to bounce
- Monday gaps fill more often than gaps on other days
Gap Scanning and Preparation
Build a morning routine to find gap trading opportunities:
- 5:30-6:00 AM: Scan for stocks gapping more than 3%
- 6:00-8:00 AM: Research catalysts, review charts
- 8:00-9:00 AM: Monitor pre-market price action
- 9:00-9:30 AM: Finalize watchlist, set alerts
- 9:30+ AM: Execute based on your plan
Common Gap Trading Mistakes
- Trading every gap: Be selective, only trade high-quality setups
- Ignoring the catalyst: A gap without a reason often fades
- Chasing extended moves: Entering after the stock has already moved significantly
- Wrong position size: Gaps require smaller positions due to volatility
- No stop loss: Gaps can move fast against you - always use stops
- Fighting strong gaps: Do not fade a stock gapping on legitimate great news
Track Your Gap Trading Performance
Pro Trader Dashboard helps you analyze your gap trades by type. See which gap strategies work best for you and improve your win rate over time.
Summary
Gap trading offers some of the best opportunities for day traders. The key is matching your strategy to the gap type: trade gap and go with strong catalysts, play gap fills with weak catalysts, and fade gaps that appear excessive. Always research the catalyst, wait for confirmation, size your positions appropriately, and use stops to manage risk. With practice, you will develop the pattern recognition skills to identify which gaps will continue and which will fill.
Want to learn more? Check out our guide on pre-market preparation or learn about news trading strategies.