Gap Trading Strategies
Price gaps create unique trading opportunities. Understanding gap types and their behavior is essential for consistent profits.
What is a Price Gap?
A gap occurs when price opens significantly higher or lower than the previous close, creating a visible empty space on the chart.
Types of Gaps
Common Gaps
- Occur in normal trading ranges
- Low volume and significance
- Usually fill quickly (within 1-3 days)
- Do not indicate trend change
Breakaway Gaps
- Occur at the start of a new trend
- Break through support/resistance
- High volume confirmation
- Often do not fill for a long time
Runaway (Measuring) Gaps
- Occur in the middle of a trend
- Confirm strong momentum
- High volume continuation
- Used to measure trend targets
Exhaustion Gaps
- Occur at the end of a trend
- Final push before reversal
- Often fill within days
- Watch for reversal signals after
Gap Trading Strategies
Gap Fill Strategy
- Identify a gap at market open
- Determine if it is a common or exhaustion gap
- If likely to fill: trade in the direction of the fill
- Stop beyond the gap extreme
- Target: complete gap fill
Breakaway Gap Strategy
- Gap breaks through key support/resistance
- Volume confirms institutional activity
- Enter in the direction of the gap
- Stop: below the gap for bullish, above for bearish
- Let winners run - these often start big moves
Weekend Gap (Forex)
- Forex market closes Friday, opens Sunday
- Gaps are common on Sunday open
- 70%+ of weekend gaps fill within the week
- Trade the fill on Sunday/Monday
Gap Statistics
- Common gaps fill 90%+ of the time
- Breakaway gaps fill less than 50%
- Weekend forex gaps fill 70%+ within the same week
- Stock market morning gaps fill 60-70% by end of day
Risk Management
- Always use stop losses with gap trades
- Size positions smaller - gaps can be volatile
- Wait for confirmation before entering
- Be aware of news events causing gaps
- Track your gap trade win rate
Key Takeaways
- Not all gaps are equal - identify the type
- Common and exhaustion gaps tend to fill
- Breakaway gaps often signal new trends
- Volume is the key differentiator
- Weekend gaps in forex are tradeable opportunities