Gap Trading

A gap is a jump: the next open is outside the prior bar's range, or at least away from the prior close, so some prices did not trade in between. Gap trading is the family of tactics that use that jump. Fading a gap means betting it will fill, that price will return to the prior close or the prior range. Following a gap means betting the open is the start of a continuation. These are opposite trades. A gap plan that does not say which one it is will take both, which means it has no view. Gaps caused by earnings, by index rebalance, or by a halt are not the same object as a small gap inside a quiet trend. Name the cause before you name the tactic.

Measure the gap against the prior range and against ATR. A gap of a fraction of ATR inside a trend is ordinary and often continues. A gap of several ATR into a level is a climax and more often retraces, though "more often" is not "always," and the exception is a trend day. Use the opening range after the gap as the decider. A gap up that cannot hold the open and breaks the opening range to the downside is a stronger fade than a gap up you short at the first print. A gap that holds and breaks upward is a continuation. The first print is the worst information of the session. Let the open auction finish.

Pick one gap behaviour and learn its conditions. For example: fade gaps that open into daily resistance and fail the opening range, target the fill, stop beyond the opening extreme. Or: follow gaps that open with the daily trend, hold the open, and break the opening range in the gap direction. Do not trade both from vibes. Avoid holding a fade into a news event that has not finished repricing. If the gap was the news, the "fill" may be days away, and a day trade that aims at the fill is using the wrong horizon.

Fading every gap because "gaps fill." Many do, and the ones that do not are the trend days, which are large. Also trading the gap before the spread has normalised. And treating a gap on an illiquid name, a wide auction with three prints, as information. That gap is the spread.

Gap statistics are full of selection bias. Traders remember the fills. Unfilled gaps become "breakaway gaps" after the fact. Without a rule that classified the gap before the open, you do not have a statistic. Gaps also skip your stop if you held overnight, which is a different problem from trading the gap in the morning. The morning trade can be skipped. The overnight gap cannot, once you are in it.