Gaps are one of the most reliable patterns in day trading. When a stock opens significantly higher or lower than its previous close, it creates opportunities that day traders can exploit. This guide teaches you how to identify, analyze, and trade gaps profitably.
What is a Gap?
A gap occurs when a stock's opening price is significantly different from its previous closing price. This creates a "gap" on the chart where no trading occurred.
Gaps happen because of news, earnings, or events that occur when the market is closed. When the market opens, prices adjust instantly to reflect the new information.
Example: A stock closes at $50 on Monday. After hours, the company reports strong earnings. On Tuesday, the stock opens at $55. This creates a $5 gap up.
Types of Gaps
Gap Up
A gap up occurs when the opening price is higher than the previous day's high. This indicates bullish sentiment and often results from:
- Positive earnings surprises
- Analyst upgrades
- Positive news announcements
- Sector-wide strength
- Overall market strength
Gap Down
A gap down occurs when the opening price is lower than the previous day's low. This indicates bearish sentiment from:
- Negative earnings
- Analyst downgrades
- Bad news or guidance
- Sector weakness
- Market selloffs
Full Gap vs Partial Gap
- Full gap: Opens completely above/below previous day's range
- Partial gap: Opens above/below close but within previous day's range
Gap Trading Strategies
1. Gap and Go (Momentum)
Trade in the direction of the gap:
- Look for strong gaps (5%+ on high volume)
- Wait for the first pullback after the open
- Enter when price resumes in the gap direction
- Stop loss below the pullback low
- Target 1-2x the initial move
This strategy works best when:
- The gap has a clear catalyst (news, earnings)
- Volume is significantly above average
- The stock is in a longer-term uptrend
- The first 5-15 minutes show continuation
2. Gap Fill (Fade the Gap)
Bet that the gap will "fill" - price will return to close the gap:
- Look for gaps without significant news catalysts
- Wait for signs of weakness/reversal at the open
- Enter a position opposite to the gap direction
- Target the previous day's close (gap fill)
- Stop loss above/below the gap high/low
Statistic: Studies show that gaps fill 70-80% of the time eventually. However, "eventually" could be hours, days, or weeks. Day traders focus on gaps likely to fill same-day.
3. Opening Range Breakout
Wait for the initial volatility to settle, then trade the breakout:
- Mark the high and low of the first 15-30 minutes
- Wait for price to break out of this range
- Enter in the direction of the breakout
- Stop loss on the opposite side of the range
Which Gaps Fill?
Not all gaps are created equal. Understanding which gaps fill helps you choose the right strategy:
Gaps Likely to Fill
- Small gaps (less than 2%)
- Gaps without clear catalysts
- Gaps into resistance levels
- Gaps on low relative volume
- Gaps against the overall trend
Gaps Unlikely to Fill (Same Day)
- Large gaps (5%+) on news
- Earnings gaps with strong guidance
- Gaps with extremely high volume
- Gaps breaking out of long-term ranges
- Gaps in the direction of the trend
Pre-Market Analysis for Gap Trading
Successful gap trading starts before the market opens:
Morning Routine
- Scan for gappers: Use a scanner to find stocks gapping 3%+ on volume
- Research the catalyst: Why is it gapping?
- Check the chart: Where are key support/resistance levels?
- Watch pre-market action: Is the gap holding or fading?
- Plan your trades: Set specific entry, stop, and target levels
Key Metrics to Check
- Gap percentage: Size of the gap relative to normal moves
- Pre-market volume: Compare to average daily volume
- Float: Low float stocks have more explosive moves
- Short interest: High short interest can fuel squeezes
- Sector performance: Is the entire sector moving?
Gap Trading Risk Management
Position Sizing
Gaps create volatility. Reduce position size accordingly:
- Risk no more than 1% of account per gap trade
- Account for wider stops due to volatility
- Smaller positions allow wider stops
Stop Loss Placement
- Gap and Go: Stop below the first pullback or opening range low
- Gap Fill: Stop above the gap high (for fading gap ups)
- Always use stops: Gap trades can reverse violently
Gap and Go Entry
- Enter: On first pullback bounce
- Stop: Below pullback low
- Target: New high of day
- Risk/Reward: 1:2 minimum
Gap Fill Entry
- Enter: On reversal candle
- Stop: Above gap high
- Target: Previous close
- Risk/Reward: 1:2 minimum
Common Gap Trading Mistakes
- Trading all gaps: Be selective - quality over quantity
- Entering too early: Wait for confirmation, not just the gap
- Ignoring the catalyst: Strong catalysts prevent gap fills
- Fighting strong trends: Do not fade strong gaps with news
- No stop loss: Gaps can extend much further than expected
- Oversizing: Volatility requires smaller positions
Gap Trading Checklist
Before trading any gap, verify:
- Gap percentage is significant (3%+ for day trading)
- Volume is above average
- You understand the catalyst (or lack thereof)
- You have identified key support and resistance levels
- You have a clear entry trigger (not just "it gapped")
- Stop loss and target are defined
- Risk/reward is at least 1:2
Track Your Gap Trades
Pro Trader Dashboard automatically tracks all your trades including gap plays. See your win rate on gap fills vs momentum trades and optimize your strategy.
Summary
Gap trading offers consistent opportunities every trading day. Success comes from understanding which gaps to trade and which to avoid. Start by focusing on either gap-and-go momentum trades OR gap fill trades - not both. Master one approach before adding the other to your toolkit.
Ready to explore more strategies? Learn about proven day trading setups or discover momentum trading techniques.