Gap Trading Strategies

Gap trading takes advantage of the price void left when a stock opens away from the prior close. Most small gaps fill, and exhaustion gaps fade, so the common edge is mean reversion: shorting a gap up that stalls, or buying a gap down that stops falling, timed off a clear reversal signal.

What is a gap and why does it matter?

A gap is the open-to-prior-close difference that leaves no trading in between. Gap up means the open is above the previous high; gap down means the open is below the previous low. The void acts like a magnet because the prices inside it were never tested, so price often returns to fill it within a few sessions.

Gaps split into two useful buckets. A common gap on light news tends to fill quickly and reliably. A breakaway or news-driven gap on a real fundamental change (an earnings surprise, an FDA decision, a merger) is far less likely to fill and should not be faded.

How do you trade a gap fill?

You trade the gap fill by entering against the gap once the move stops extending, then targeting the pre-gap close. On a gap up, look for the rally to stall and roll over; on a gap down, look for selling to dry up and price to base. The fade direction is always toward the prior close.

Smaller gaps fill faster than larger ones. A 1 to 3 percent gap is the practical sweet spot: large enough to be worth trading, small enough to fill inside a few days. Gaps above 5 percent often carry real momentum and can take weeks to fill, if ever.

When should you NOT fade a gap?

Do not fade a gap created by news that changes the business. A 9 percent gap on a guidance raise or an acquisition is a new trend, not an overreaction. Fading it means standing in front of a real move. The honest filter: if the size of the move is proportionate to the size of the news, leave it alone.

How does the Volatility Box fit gap trading?

The Volatility Box is a counter-trend volatility model, which makes gap fades a natural fit. The models plot two clouds around price for the current session: the green cloud sits above price (the short zone) and the orange cloud sits below price (the long zone). They mark how far price is expected to travel given current volatility, not a direction to chase.

A gap is most actionable when it opens price into or near a cloud. The signal you wait for is a breach, which is price tagging at least the aggressive cloud. A gap up that pushes into the green cloud and stalls is a short-side breach toward the gap fill. A gap down that drops into the orange cloud is a long-side breach toward the fill. Price spends most of its time drifting between the clouds with nothing to do; the breach is the part that carries a volatility edge.

One case removes the edge entirely. If a gap clears the cloud completely and keeps running, volatility has blown past the expected range. The models can compress or invert on days like that, which is the signal to sit out rather than fade into strength. A gap that gaps clean through the upper cloud on heavy volume is telling you the move is bigger than normal, so step aside.

The Daily model gives one level for the whole session and is harder to reach, so a gap that tags the Daily conservative cloud carries more weight. The Hourly model resets each hour and catches the opening volatility spike, which is where individual names like a large-cap tech stock get breached while the index does not. In our historical backtests the counter-trend reads have shown an edge; treat that as context, not a forecast, and size every gap fade for the chance it does not fill.

How do you find gap setups in the platform?

Read the broad market first on the Today page, then move to the Scanner and sort for names with a meaningful overnight move. Pull each candidate onto a chart and confirm price has opened into or near a cloud rather than mid-range. The Scanner signal types are TR (Trend Reversal), FP (First Pullback), and ME (Momentum Entry); a Trend Reversal at a cloud edge in the gap-fill direction is the cleanest fade. Each setup also shows a 0 to 100 conviction score with a letter grade to weigh alongside the breach.

Related

• Reading the models
• Counter-trend reversal setups
• Scanner workflow
• Hourly vs Daily models

Educational content only. Nothing here is financial advice or a guarantee of results.