Strategic Gap Trading

Navigating Types, Triggers, and Common Pitfalls


What is Gap Trading?

Gap trading is a strategy based on the difference between the opening price of a security and the previous day’s closing price. This can occur due to general market fluctuations or news released when the market was closed. Gaps are important because they represent an imbalance of supply and demand, presenting potential intraday trading opportunities.

Types of Gaps

There are different types of gaps:

  1. Normal gaps, which occur regularly due to normal order flow and are likely to be filled.
  2. Breakaway gaps, which alter price structure, breaking out of a channel, trend, above resistance, or below support.
  3. Exhaustion gaps, which are large gaps at the end of a trend or very extended move that either reverses the gap or stagnates.
  4. Runaway gaps, which occur in the middle of a trend, jumping several price levels due to extreme supply and demand imbalance.

Identifying the type of gap is crucial in forming your trading strategy. Some of the key aspects to consider include the percentage size of the gap, whether there’s a catalyst, the overall chart structure, and if the gap occurred at the end or the beginning of a trend.

Trading Strategies

One common strategy is the ‘gap and go,’ where you identify a potential runaway or breakaway gap, predict where the price may go, and create a plan to capitalize on it. Trade triggers such as the opening range breakout, prior candle break, reversal candle, trendline break, or high break can be used to enter trades, with the stop loss being a key consideration.

Be aware of signs that a gap may be exhausted, like no movement after 60 minutes or a counter trend move that isn’t defended.

Final Thoughts

Remember to categorize the gap type, formulate a plan of action, wait for your trigger, and stick to the plan. Common mistakes to avoid include ignoring the overall market trend or failing to implement effective risk management.

This is the first part of the Gap Trading Series Webinar. Click here to go to Part 2.

Gap Trading Engine for Tradingview

Test different gap fill strategies and variables with this custom Trading View strategy code.