Gap Down

A gap down opens below the reference you named. A full gap down is an open below the prior low, leaving an untraded hole. An open below the prior close but inside the prior range is a weak open, not necessarily a gap in the strict sense. A gap down is bearish location, not a finished forecast. Markets gap down into support and reverse, and they gap down and trend lower. News gaps, earnings, policy, a shock, are more likely to continue than a small gap down inside a quiet range, and they are also more likely to overshoot and snap. Cause, size relative to ATR, and the nearby level decide the tactic. The colour of the open does not.

Classify the open against the prior low, the prior close, and the next daily support. Then wait for the opening range. A gap down that cannot make new lows and reclaims the open is a reversal candidate. A gap down that holds under the open and breaks the opening range downward is a continuation. Relative volume tells you whether the open is a real repricing. A small gap down on ordinary volume in an uptrend is often noise or a gift to the pullback buyer. A large gap down on extraordinary volume is the market changing its price, and fading it is an expert trade, not a default.

The bullish use is the failed gap down: open below a level, sweep, and reclaim, with a stop under the opening extreme and a target at the fill. This is a reversal trade and carries reversal risk. Take it at a level you already had, a weekly support or a prior value area, not because the open was red. If the reclaim fails, you are out. A second attempt at the same gap is how a small loss becomes the morning.

The bearish use is continuation: a full gap down with the daily trend, accepted under the open, breaking the opening range lower, with room to the next support. Cover into that support. A gap down that is already sitting on major support has no room, and the short is a late short. Let it either break the support or reclaim. The open in between is a trap for both sides, which is a fine place to do nothing.

Buying every gap down because prices are "cheaper." Cheaper than yesterday can be the start of a markdown. Also holding a long through a news gap and then calling the decision gap trading. The gap already happened to you. The morning plan is a new trade, or it is an exit. And ignoring the reason. A gap down on a trading halt and a gap down of half an ATR are not one setup.

Gap-down opens can be illiquid. The first prints are wide, and a stop under them may be a long way from the price you wanted. Data around the open is messy. And unfilled gap downs in a bear market are the ones that hurt a habitual fade the most. If your stats do not separate trend days from range days, you do not know whether your gap-down fade works. You know that it felt clever on the days it filled.