Overview
Gaps form on overnight news, earnings or sector moves. Gap traders classify the gap first, then decide whether they are trading continuation or a fill back toward the prior close.
How it works
Pre-classify the gap by cause and size, define the opening range, and trade either the break of that range or the failure of it back into the gap.
Typical setup
- Gap with an identifiable cause
- Opening range established in the first minutes
- Trade the break or the failure of that range
- Stop on the opposite side of the range
Advantages
- Structured decision at the open
- Defined reference levels
- Recurring daily opportunity
Risks
- Earnings gaps are unpredictable
- Very wide opening spreads
- Fast two-sided volatility
Common mistakes
- Trading the first tick with no range
- Assuming all gaps fill
- Holding through an unrelated catalyst
Risk management notes
Opening volatility means smaller size and an accepted possibility of slippage on the stop.
This guide is educational. It is not a signal service, a recommendation, or a claim that this strategy is profitable. Trading involves substantial risk of loss.