Reviewed by Gotrade Internal Analyst
Not all price movements happen during regular trading hours. News, earnings, and overnight events can cause prices to jump from one level to another without trading in between. These jumps are known as gaps, and they form the basis of gap trading strategies.
Gap trading focuses on how price behaves after a gap occurs. Some gaps fade quickly, while others lead to strong trends. This guide explains gap trading meaning, how a gap trading strategy works, and the risks involved.
Understanding Gap Trading
Gap trading is based on price discontinuities between trading sessions.
A gap occurs when a stock opens at a significantly different price than where it closed previously.
This creates empty space on the chart where no trades occurred.
Gap trading is the practice of trading these price jumps based on expectations of continuation or reversal.
Why gaps happen
Gaps usually occur due to new information released when markets are closed, such as:
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Earnings reports
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Economic data
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Corporate announcements
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Geopolitical events
When markets reopen, price adjusts instantly to reflect this information.
Types of Gaps Traders Watch
Not all gaps behave the same way.
Common gaps
Common gaps occur in sideways or range bound markets.
They often fill quickly, meaning price moves back toward the prior close.
These gaps usually reflect short term imbalance rather than strong conviction.
Breakaway gaps
Breakaway gaps occur when price gaps out of a consolidation or range.
They often signal the start of a new trend and may not fill quickly.
Volume tends to be higher on breakaway gaps.
Continuation gaps
Continuation gaps appear during established trends.
They suggest momentum is strong and the trend may extend further.
Exhaustion gaps
Exhaustion gaps occur late in a trend.
They reflect emotional buying or selling and are often followed by reversals.
Identifying the gap type helps set realistic expectations.
How a Gap Trading Strategy Works
Gap trading strategies vary based on assumptions.
Gap and go strategies
A gap and go strategy assumes that strong gaps will continue in the direction of the gap.
Traders look for:
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High volume
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Strong opening momentum
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Confirmation after the open
These trades aim to capture early trend continuation.
Gap fill strategies
Gap fill strategies assume price will retrace toward the previous close.
These setups are more common in common gaps and range bound markets.
Confirmation is critical because not all gaps fill.
Timing and execution considerations
Gap trading often occurs shortly after the market opens.
This period is highly volatile, and spreads can widen.
Execution quality matters more than precision.
Risks and Limitations of Gap Trading
Gap trading carries unique risks.
Increased volatility and slippage
Opening minutes often have fast price movement.
This increases the risk of slippage and poor fills.
Stops may not execute at expected levels.
False signals and reversals
Early momentum can fade quickly.
What appears to be a strong gap can reverse sharply once initial orders are absorbed.
Overnight risk exposure
Holding positions overnight exposes traders to gap risk.
Unexpected news can lead to adverse price jumps that bypass stops.
When Gap Trading Works Best
Gap trading performs best when:
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Liquidity is high
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News impact is clear
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Volume confirms price movement
It struggles when:
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Gaps are small or unclear
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Markets are choppy
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Volume fades after the open
Selectivity is essential.
Gap Trading vs Other Strategies
Gap trading differs from trend or range trading.
It focuses on event driven price adjustment rather than ongoing structure.
Because gaps occur infrequently on individual stocks, gap trading often requires scanning many assets.
Conclusion
Gap trading strategies aim to profit from price jumps caused by overnight events. Understanding gap trading meaning, gap types, and execution risks helps traders approach these setups realistically.
Gaps offer opportunity, but also heightened risk. Discipline, selectivity, and risk management are critical.
If you want to observe gap behavior across US stocks in real market conditions, you can use the Gotrade app. Charting tools help visualize gaps while managing position size responsibly.
FAQ
What is gap trading?
It is trading strategies based on price gaps between trading sessions.
Do all gaps fill?
No. Some gaps fill quickly, while others lead to trends.
Is gap trading suitable for beginners?
It can be challenging due to volatility and execution risk.
Why is gap trading risky?
Because price can move quickly and bypass stop levels.
Reference:
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Investopedia, Gap Trading Strategies, 2026.
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ChartSchool, Gap Trading Strategies, 2026.
Disclaimer
Gotrade is the trading name of Gotrade Securities Inc., which is registered with and supervised by the Labuan Financial Services Authority (LFSA). This content is for educational purposes only and does not constitute financial advice. Always do your own research (DYOR) before investing.
