What Is Gap Trading?
A gap occurs when a stock opens significantly higher or lower than the previous close—with no trading in between. This creates a "gap" on the chart. Gaps happen due to overnight news, earnings, or macro events.
Gap traders exploit one statistical truth: 70-80% of gaps get filled (price returns to previous close) within days or weeks. The strategy: fade the gap or follow the momentum.
Types of Gaps
1. Common Gap: Small gap (1-2%), no major news. High fill probability (85%+).
2. Breakaway Gap: Large gap (3%+) on major news, starts new trend. Lower fill probability (30-40%).
3. Exhaustion Gap: Gap at end of trend, momentum fading. High fill probability (70-80%).
Strategy: Fade common gaps, ride breakaway gaps, fade exhaustion gaps.
The Fade-the-Gap Strategy
When a stock gaps up or down on no major news, it often overreacts—creating a reversion opportunity.
Fade Setup
- Stock gaps up 2-4% on no major catalyst
- First 30 minutes: Watch for rejection at gap high
- Entry: Short when price starts filling gap (first red candle after initial spike)
- Target: Previous day's close (full gap fill)
- Stop: Above gap high (2-3%)
Win rate: 65-75% when criteria met
The Gap-and-Go Strategy
When a strong catalyst drives the gap, don't fade it—ride it.
Gap-and-Go Setup
- Stock gaps up 5%+ on earnings beat, major news
- Pre-market: Confirm volume is 3x+ average
- Entry: Buy first pullback after open (VWAP retest)
- Target: +10-15% from gap open
- Stop: Below pre-market low
Win rate: 50-60% but winners run 2-3x losers
Real Example: Gap Fill on SPY
Trade Breakdown
Previous close: SPY $450
Gap open: $453 (+0.67%) on no major news
First 15 minutes: Pops to $453.50, then rejects
Action: Short at $453 (on first red candle)
Target: $450 (gap fill)
Stop: $454.50 (above gap high)
Outcome: SPY fills gap by 11:30 AM. Exit at $450.20. Profit: $2.80 per share on $453 entry = 0.62% gain in 2 hours.
When to Avoid Gap Trading
- Low volume gaps: Pre-market volume < 500k = unreliable
- Earnings gaps: Too volatile, unpredictable
- Market-wide gaps: If SPY gaps, individual stocks less likely to fill
- Trend-confirming gaps: Strong uptrend + gap up = don't fade
Final Thoughts: The Morning Opportunity
Gap trading is one of the highest-probability intraday strategies—if you know which gaps to fade and which to follow.
Most retail traders panic when they see a gap. Professionals see opportunity. They know the stats. They know 70%+ of gaps fill. And they position accordingly.
Your edge: patience, preparation, and probability. Let the gap show its hand in the first 30 minutes—then strike.