Gap Trading Strategy: Play the Open
A gap trading strategy that trades the opening gap on stocks, fading or following the gap based on the type and the prior day's close.
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Gap Trading Strategy: Play the Open
Overview
A gap is a discontinuity between yesterday's close and today's open. Gaps are driven by overnight news, earnings, or order imbalance, and they fall into three types: breakaway (start of a new move), runaway (continuation), and exhaustion (final thrust). This strategy classifies the gap and trades it — fading exhaustion gaps, following breakaway gaps.
Setup
- Instruments: liquid stocks, index futures, ETFs
- Timeframe: daily chart for the gap, 5-minute for entry
- Indicators: the prior day's close, support/resistance, ATR(14), volume
- Market regime: any — gaps form most often after earnings or macro events
A gap is significant when its size is at least 0.5 × the average daily range (ATR).
Entry rules
- Identify the gap: today's open is materially above (gap up) or below (gap down) yesterday's close
- Classify the gap:
- Breakaway: gaps out of a consolidation with volume — follow it
- Runaway: gaps in an existing trend with volume — follow it
- Exhaustion: gaps after an extended move on low follow-through — fade it
- Breakaway/runaway: enter in the gap direction after the first 5-minute pullback holds
- Exhaustion: enter against the gap after price fills back through the gap zone
Stop loss
- Stop beyond the gap's extreme — below the gap low for longs, above the gap high for shorts
- Maximum stop: 1 × ATR(14) from entry
- Exit if price closes back through the gap midpoint — the gap is filling
Use the stop loss calculator to set the distance.
Take profit
- Breakaway/runaway: target the measured move of the prior base, or trail with the 20 EMA on 5-minute
- Exhaustion: target the prior day's close (gap fill)
- Aim for a minimum 2R
Confirm with the risk-reward calculator.
Risk management
- Risk 1% of account equity per gap trade
- Position size = risk amount ÷ (entry − stop). Verify with the position size calculator
- Trade only one gap per morning — correlated gaps count as one risk
- Avoid gaps smaller than 0.5 × ATR; they are noise, not opportunity
When it fails
Gap trading fails when the gap is misclassified — fading a breakaway or following an exhaustion gap. Volume and the prior context decide the type. If the first 30 minutes show no follow-through in either direction, the gap is uncommitted; stand aside rather than guess.
Strategy is for educational purposes only. Not financial advice.