Short answer: a gap trading strategy exploits the space on a chart where price opens away from the previous close with no trading in between. Gaps form when information arrives while the market is closed. The two main approaches are trading continuation in the gap's direction and trading the fill back toward the prior close, and choosing between them depends on the gap's type and size.
Why gaps form
A gap appears whenever the balance of orders changes while trading is suspended. Earnings releases, policy decisions, and overnight news all reprice a market before the next session opens, and the opening auction settles at whatever price clears the accumulated orders.
Gaps therefore require a closed period. Markets that trade continuously, such as spot currency, produce very few, usually only over the weekend break. Equity markets with a defined session produce them regularly, and the NYSE hours and calendar page sets out the session boundaries that create the opportunity.
Trading halts create the same effect within a session. When trading resumes after a halt, price can reopen far from where it stopped, and FINRA's overview of trading halts explains the mechanics.
The four types of gap
| Type | Where it appears | What it suggests | Usual approach |
|---|---|---|---|
| Common gap | Inside a range, no news | Little information | Often fills quickly |
| Breakaway gap | At the start of a new move | Genuine repricing | Trade continuation |
| Runaway gap | Mid-trend | Acceleration | Trade continuation, carefully |
| Exhaustion gap | Late in an extended move | Final surge before a turn | Fade, with tight risk |
Classifying a gap correctly is most of the work, and it can only be done with reference to what preceded it. A gap in isolation tells you almost nothing. The same size gap is a breakaway signal after a long consolidation and an exhaustion signal after an extended run.
Gap fill and why it happens
A gap fills when price returns to the previous close, closing the empty space on the chart. Two forces drive it.
The first is mechanical. Orders that could not execute during the closed period remain unfilled, and some of them get worked once trading resumes, pushing price back toward the prior level.
The second is behavioural. Traders who see an outsized opening move often fade it, expecting the initial reaction to be excessive.
The often-repeated claim that gaps always fill deserves scepticism. Many do, particularly small ones with no fundamental cause. Breakaway gaps on genuine news frequently do not, and waiting for a fill that never arrives is a well documented way to lose money. Any specific fill percentage quoted without naming the market, period, and gap definition should be treated as folklore.
Strategy one: gap and go
This approach trades continuation. The logic is that a large gap on genuine news reflects a real repricing, and the initial direction often persists through the first part of the session.
- Filter by size and cause. Require a gap larger than a normal opening range and a plausible reason for it.
- Wait for the first few minutes. The opening print is not representative. Let an initial range form.
- Enter on a break of that range in the gap's direction.
- Stop below the range low for a long, or above its high for a short.
- Aim for the next structural level rather than a fixed R multiple, because earlier swing points are where price tends to react.
- Exit by a set time if the move stalls. Continuation trades that have not worked in the first hour rarely work later.
Strategy two: fading the gap
This approach trades the fill. It suits smaller gaps with no clear cause, particularly in instruments that have been range bound.
- Filter out news-driven gaps. If a specific catalyst explains the move, fading it is fighting new information.
- Require the gap to be modest relative to the instrument's average daily range.
- Wait for the initial push to stall. Entering immediately at the open means catching a move that may still be extending.
- Enter as price turns back toward the prior close.
- Stop beyond the opening extreme. That price says the gap was real repricing rather than an overreaction.
- Target the previous close and take profit there rather than hoping for more.
The difference between the two strategies is entirely about the gap's cause and size, which is why classification comes first and execution second.
Risk management around gaps
Gaps are the clearest reminder that stops are not guarantees. A protective stop resting below the market does not execute at its level when price opens far beneath it. The order becomes a market order and fills at whatever is available, which can be substantially worse.
Three consequences follow.
Position size must account for gap risk on any position held through a closed period, not just for the intraday stop distance.
Stop limit orders are dangerous as protective exits across a gap, because the limit may never be reachable, leaving the position open while price continues.
Leverage compounds the problem. The SEC's investor guidance on margin sets out how borrowed funds magnify losses, and a leveraged position that gaps against you can lose more than the planned risk before any order executes.
Traders working through a prop firm evaluation should treat overnight exposure as a specific decision rather than a default. A fixed daily loss limit can be breached by a single opening print, before any trading decision is made. Pivex publishes its daily and total loss parameters before an attempt begins, and holding through a known event with a full-size position is a poor use of that budget.
Measuring a gap properly
Size is the variable that decides almost everything, and measuring it in points is close to useless because it says nothing about whether the move is unusual for that instrument.
The workable measure is the gap expressed as a fraction of the instrument's recent average daily range. A gap equal to a tenth of a normal day is noise. One equal to a full day's range is a genuine repricing that deserves a different approach entirely.
That ratio also sets realistic expectations for the session. If the gap has already consumed most of an average day's movement, the remaining room is limited, and continuation trades have less to work with than the chart suggests.
A second measurement worth taking is where the gap sits relative to recent structure. A gap that opens directly into a level that has capped price several times before is far less likely to extend than one opening into clear space. Marking those levels the evening before takes a few minutes and changes the classification of a large share of gaps.
Which markets produce tradeable gaps
Not every market offers this opportunity, and knowing which yours is prevents a lot of wasted effort.
Equity index products gap regularly because the underlying market closes overnight and news arrives during that window. This is where most published gap strategies were developed.
Individual company instruments produce the largest gaps, driven by scheduled announcements. They also carry the highest single-name risk, and a gap of twenty percent is not unusual on a surprise.
Spot currencies rarely gap because trading runs continuously through the week. The exception is the weekend break, where a gap can appear at the Monday open following news over the weekend. Traders holding currency positions over a weekend are exposed to precisely that risk.
Cryptocurrencies trade continuously with no scheduled close, so genuine gaps are rare. Sharp moves happen, but they occur with trading rather than across an empty period, which means stops can execute normally.
The practical implication is that a gap strategy is a session-market strategy. Applying it to a continuously traded instrument produces a handful of opportunities per year rather than several per week.
Gaps produce two reliable psychological errors.
The first is the urge to act immediately at the open. The first minutes carry the widest spreads and the least representative prices, and orders placed then routinely fill far from expectation. Waiting five minutes costs little and removes most of that.
The second is anchoring to the previous close. Traders assume the old price was correct and the new one is wrong, which is exactly backwards when genuine news has arrived. The market has repriced, and the prior close is history rather than a magnet.
Execution technique matters more than usual here. Limit orders protect against the wide opening spreads. Market orders guarantee a fill when exiting matters more than pricing. Deciding which you will use before the open, rather than in the moment, is the practical defence.
Preparing for the sessions that produce gaps
Most large gaps are foreseeable in the sense that the events causing them are scheduled. Central bank decisions, employment releases, and inflation data all appear on public calendars well in advance, including the FOMC schedule, the employment report schedule, and the consumer price index release.
A simple routine takes ten minutes. Check the calendar for the coming week, note which sessions carry event risk, decide in advance whether you will hold positions through them, and reduce size on the ones you keep. That preparation does more for results than any refinement of the entry rules above.
Next step: record the opening gap on your main instrument every session for a month, noting its size, whether news explained it, and whether it filled that day. That personal dataset replaces every general claim about fill rates with numbers from the market you actually trade.
Before participating, review Pivex's current program rules and decide whether a simulated proprietary trading evaluation fits your experience and risk limits. Participation does not guarantee a reward, income, or any particular trading result.