Traders love to talk about “trading the gap,” but they often skip over the first, and most critical step — defining what a gap is and why it is happening. The reality is that there are multiple types of gaps, and each can offer different opportunities and risks.The key is knowing the type of gap you are dealing with and how to respond.
What Is a Gap?
In price action terms, a gap on a chart occurs when the price jumps from one trading period to the next without any trades in between. It is most commonly seen between the close of one session and the open of the next session across multiple asset classes. Even with assets that trade 24 hours a day, gaps are often seen at the start of the next trading week.
Why Do Gaps Form?
The market is a continuous auction of buyers and sellers, but between sessions or over weekends, new information can drop that affects the market.Economic data releases, corporate earnings announcements, geopolitical developments, and unexpected supply/demand changes can all occur outside of market hours.When the market reopens, the price adjusts instantly to reflect this. If the next available trades are far from the previous close, you get a gap.In continuous markets like forex, gaps most often appear on Monday opens after weekend news, but may show up on intraday charts after unexpected events that cause major liquidity changes.
The Main Types of Gaps
Common Gaps
- Usually small.
- Occur within an established range or trend
- Most likely to fill quickly
- No strong underlying cause
- Successful trades reliant on being there at the time of occurrence
Breakaway Gaps
- Appear at the start of a new trend
- Break out from a long consolidation or key support/resistance
- Driven by strong conviction created by a big event
- Less likely to fill quickly
- Represent a genuine shift in market positioning.
Runaway (Continuation) Gaps
- Tend to occur mid-trend
- Signal momentum in the previous direction is intact
- Often act as future support or resistance levels
- May not fill until the trend is complete
Exhaustion Gaps
- Form near the end of a strong move
- Often result from a final push of buying/selling pressure.
- Price will often reverse after exhaustion gaps as the last participants are trapped
The key is to identify when and which of these four types of gaps is in play and decide whether to fade (trade against) the gap or go with it.
Why Price Often Fills Gaps
The idea of “gap filling” is generally dependent on market mechanics when a gap forms:Traders caught on the wrong side may want to exit near the pre-gap price. Large unfilled orders from before the gap can be sitting in the relevant price range. And if the gap was driven by an emotional overreaction rather than strong fundamentals, the price often reverts to normal.But although gap filling may be a common occurrence, it is not guaranteed. As with any trading approach, risk management is critical, and having a clear set of unambiguous criteria for both entry and exit is a must.Ideally, your risk management should consider the following:
- Knowing the context. Understand whether the gap is technical (range breakout) or news-driven before acting. This impacts the type and longevity of any move.
- Avoid chasing. Gap approaches are always best actioned early to provide a higher probability outcome. Not entering at all and waiting for the next opportunity is better than entering late.
- Place stops strategically. For gap fill approaches, many traders will place stops go beyond the gap extreme, for go trades, stops go just inside the gap.
- Consider the volatility of the underlying asset. Position your trade size accordingly, appropriate to the technical picture and your tolerable level of risk.
Gap Trading Strategies
Gap Fill (Fade) Strategy
This tends to offer the optimum opportunities with common and exhaustion gaps.Traders should be patient and wait for early signs across multiple short timeframes that momentum is fading after the open bar(s).The approach here is to enter in the opposite direction of the price gap move. Profit targets are usually set at a price prior to (but not at) the pre-gap price Stops may be placed just above the initial gap price, and a trailing approach to locking in profit can be used to enable early exit if conditions change.Example: If EURUSD gaps up 40 pips on a quiet Monday with no news, and price struggles to push higher in the first hour, you might consider a short trade with a profit target at Friday’s close.
Gap and Go Strategy
This approach is suited to breakaway or continuation gaps. Traders should look for a move in the gap direction after the first bar with a high-volume confirmation that the pressure is continuing in that direction.Trade entry is in the direction of the gap, and many traders would accumulate further positions should the momentum increase on continuation of a price move. Initial stops are often placed just inside the gap, giving a little space to accommodate market noise and a potential retest. Aim to capture momentum, with a trailing stop approach to ride the trend aligned with any accumulation into the positionExample: Oil price gaps up on a Monday after Friday's COT (commitment of traders) data release, suggesting a change in institutional interest and breaks out from a 1-month range on high volume.Important: Both these strategies, although they can often be seen at the same initial gap on a chart, are different in terms of entry and exit approaches. They merit a separation in terms of trading plan and should not be combined as a single approach with a variation.
Final Thoughts
Gap trading is as much about identifying context and having clear criteria for what constitutes a gap. A real edge with gap trading comes from understanding why it has formed, what type it is, and early identification of what is happening.Whether you trade gaps manually or with an EA, it is good to remember that a gap is simply the space; any opportunity will come from reading what that space is telling you.
Los artículos son elaborados por analistas y colaboradores de GO Markets y se basan en su propio análisis independiente o en sus experiencias personales. Las opiniones, puntos de vista o estilos de trading expresados son propios de los autores y no deben considerarse como representativos de, ni compartidos por, GO Markets. Cualquier consejo proporcionado es de carácter “general” y no tiene en cuenta tus objetivos, situación financiera ni necesidades personales. Considera si dicho consejo es adecuado para tus objetivos, situación financiera y necesidades antes de actuar sobre él. Si el consejo se refiere a la adquisición de un producto financiero en particular, debes obtener nuestra Declaración de Divulgación (Disclosure Statement, DS) y otros documentos legales disponibles en nuestro sitio web antes de tomar cualquier decisión.
