GapTrading

Gap trading is a strategy focused on profiting from price gaps—when a stock opens significantly higher or lower than its previous close. Gap traders either bet on the gap filling (price returning to the previous close) or gap continuation (price moving further in the gap direction). The approach depends on the type of gap, volume, and overall trend context.

How Gap Trading Works

Gap trading strategies depend on the type of gap and market context:

Gap Trading Decision Tree:
1. Identify the gap type (common, breakaway, exhaustion)
2. Assess volume (high volume = more likely to continue)
3. Check overall trend (gaps with trend = stronger)
4. Watch first 30 minutes of trading
5. Choose strategy: fade the gap or follow it

Quick Reference: Gap Types

Gap Type	Characteristics	Likely Outcome
Common	Small, within range	Usually fills same day
Breakaway	High volume, starts trend	Rarely fills quickly
Continuation	Mid-trend, in gap direction	Often continues
Exhaustion	High volume, end of trend	Usually fills as trend reverses

Example: Gap Fill Trade

Setup: Stock gaps up 4% on no significant news

Pre-market: Stock at ₹520, previous close ₹500 Market Open: Opens at ₹522 First 15 min: Stock fails to push higher, starts fading

Trade:

• Entry: Short at ₹518 (after confirmation of weakness)
• Stop: ₹528 (above opening high)
• Target: ₹502 (gap fill)

Result:

• Stock fills gap to ₹501 by 11 AM
• Exit at ₹503
• Profit: ₹15 per share

Example: Gap Continuation Trade

Setup: Stock gaps up 6% on earnings beat with heavy volume

Pre-market: Stock at ₹310, previous close ₹290 Market Open: Opens at ₹315 on 5× normal volume First 30 min: Stock builds on gains, breaks ₹320

Trade:

• Entry: Buy at ₹322 (breakout confirmation)
• Stop: ₹310 (below opening price)
• Target: ₹350 (measured move)

Result:

• Stock continues to ₹345 by end of day
• Exit at ₹343
• Profit: ₹21 per share

Gap Trading Strategies

1. Gap and Go

Enter in the gap direction when price shows continuation after the first 15-30 minutes. Ride the momentum.

2. Gap Fade

When gaps are likely to fill, trade opposite the gap direction. Fade gap ups, buy gap downs. Best for common gaps.

3. Opening Range Breakout

Define the first 15-30 minute range. Trade breakouts from this range in either direction.

4. Gap Fill + Trend

After a gap fills, trade in the original gap direction if the trend supports it. Gap fill provides better entry.

Criteria: Fade vs. Follow

Fade the Gap When:

• Small gap (< 3%)
• No significant news
• Low volume
• Counter to larger trend
• Previous gaps have filled

Follow the Gap When:

• Large gap (> 4%)
• Significant news/earnings
• High volume (2×+ average)
• With the larger trend
• Price action shows strength

The First 30 Minutes Rule

The first 30 minutes of trading often reveal the day’s direction:

Continuation Signs:

• Price stays above gap open level
• Volume confirms the move
• Buyers stepping in on dips

Fill Signs:

• Price starts falling from open
• Selling volume increases
• Can’t establish higher ground

Don’t trade immediately at open. Wait for price action to reveal intention.

Common Mistakes

1. Assuming all gaps fill – While most do eventually, timing is uncertain. Unfilled gaps can run for weeks.

2. Fading high-volume gaps – Big gaps on news and volume often continue. Don’t fade them.

3. Trading immediately at open – Opening volatility is extreme. Wait 15-30 minutes for clarity.

4. Ignoring overall trend – Gaps in the trend direction are more reliable than counter-trend gaps.

How JournalPlus Tracks Gap Trades

JournalPlus identifies and logs gap trades, tracking whether you traded gap fills or continuations, your timing relative to open, and how different gap types performed for your strategy.