strategy · Rule-based
Gap Trading Strategy: Play the Open
A gap trading strategy that fades or follows opening gaps based on gap type, support and resistance, and the first 30 minutes of trade.
#strategy#gap-trading#stocks#day-trading
Gap Trading Strategy: Play the Open
Overview
A gap occurs when the opening price differs from the previous close, leaving a void on the chart. Gaps are driven by overnight news and order flow. This strategy classifies the gap and trades it: fade exhaustion gaps, follow breakaway and continuation gaps, ignore common gaps.
Setup
- Instruments: stocks with overnight news, index futures
- Timeframe: 5-minute chart, daily for gap measurement
- Gap types: breakaway, continuation (runaway), exhaustion, common
- Indicators: prior day's high/low, opening range, volume
Entry rules
- Measure the gap: today's open vs. yesterday's close
- Classify the gap using the table below
- Fade exhaustion gaps: short after the first 30 minutes if price stalls at the gap edge
- Follow breakaway/continuation gaps: enter in the gap direction after the opening range (first 30 min) holds
- Confirm with above-average opening-volume
Gap classification
| Type | Volume | Action |
|---|---|---|
| Breakaway | High | Follow in gap direction |
| Continuation | High | Follow in gap direction |
| Exhaustion | High then fades | Fade |
| Common | Low | Ignore |
Stop loss rules
- Stop: just beyond the gap extreme (high of gap for shorts, low for longs)
- Time stop: exit if price fills the gap within the first hour
- Maximum risk per trade: 1% of account
Take profit rules
- Fade target: yesterday's close (gap fill)
- Follow target: measured move = gap size × 1.5
- Or trail with the opening-range high/low as the stop
- Minimum RR: 2:1
Risk management
| Parameter | Value |
|---|---|
| Risk per trade | 1% of account |
| Max gap trades per day | 2 |
| Position size | Risk ÷ (entry − stop) |
| Gap size filter | Only trade gaps > 1 × ATR(14) |
| News filter | Skip earnings gaps unless you understand the report |
Use the position size calculator and the stop-loss calculator before the open.
Common mistakes
- Treating every gap as tradeable — common gaps should be ignored
- Trading gaps during illiquid pre-market conditions
- Failing to classify the gap before entry — different types, different playbooks
Key principle
The opening 30 minutes reveal the gap's true character. Breakaway and continuation gaps hold; exhaustion gaps fade. Wait for the opening range to form before committing.
Strategy is for educational purposes only. Not financial advice.