Gap Trading Strategy

Trade the market opening gaps that signal overnight conviction or overreaction.

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Overview

What is Gap Trading Strategy?

A price gap occurs when an asset opens significantly higher or lower than the previous close, leaving an empty zone on the chart where no trading took place. Gaps are among the most emotionally charged price events, representing overnight conviction (sentiment shifts, news, earnings) that materialises the moment markets reopen.

There are four types of gaps: Common gaps (routine, fill quickly, no trading significance), Breakaway gaps (occur at the start of a new trend, high volume, rarely fill), Runaway/Continuation gaps (occur mid-trend, confirm momentum), and Exhaustion gaps (occur at trend extremes on declining volume, quickly fill).

Gap fill strategies exploit the tendency of gaps to be "filled" — meaning price returns to the pre-gap level. Studies show that approximately 70% of gaps eventually fill, making fade strategies statistically sound. The trade: if price gaps up at open, short near the gap high and target the previous close. If it gaps down, buy near the gap low and target the fill.

Gap continuation strategies (particularly for breakaway and runaway gaps) take the opposite approach: buy the gap-up open after a valid breakout, holding for a continuation move. These gaps often mark the beginning or middle of strong trending moves and should not be faded.

How It Works in auto-Trading

Automate It

auto-Trading detects opening gaps by comparing the current candle open to the previous candle close. The system classifies gaps using volume and trend context: low-volume gaps in ranging markets trigger gap-fill limit orders; high-volume breakaway gaps trigger momentum continuation signals. Users configure minimum gap size (as percentage or ATR multiple) to filter noise.

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External Resources

Learn from Trusted Sources

Investopedia — Gaps↗

Complete overview of price gaps and their trading significance.

TradingView — Gap Scripts↗

Gap detection and trading scripts on TradingView.

StockCharts — Gap Analysis↗

StockCharts' detailed guide to gap analysis.

Strategy Code

Pick a script below, copy it, and use it on your chart.

Pine Script (TradingView)

This is a TradingView Pine Script strategy example for this page concept. Paste it into the TradingView Pine Editor, add it to your chart, and run it in the Strategy Tester.

//@version=6
strategy("Gap Trading Strategy", overlay=true)
atrLen = input.int(14, "ATR Length")
atrMult = input.float(2.0, "ATR Mult")
emaLen = input.int(50, "Trend EMA")
ema = ta.ema(close, emaLen)
atr = ta.atr(atrLen)
longSignal = ta.crossover(close, ema)
stop = strategy.position_avg_price - atr * atrMult
if longSignal
    strategy.entry("Long", strategy.long)
strategy.exit("ATR Exit", "Long", stop=stop)
plot(ema, "EMA", color=color.new(color.orange, 0))

ThinkScript (thinkorswim)

This is a thinkorswim ThinkScript strategy example for this page concept. Open thinkorswim, create a custom strategy, paste the script, and apply it to your chart.

input atrLength = 14;
input emaLength = 50;
def atrVal = ATR(atrLength);
def emaVal = ExpAverage(close, emaLength);
def buySignal = close crosses above emaVal;
def sellSignal = close < emaVal - (2 * atrVal);
AddOrder(OrderType.BUY_AUTO, buySignal, close, 1, Color.GREEN, Color.GREEN, "ATR Buy");
AddOrder(OrderType.SELL_AUTO, sellSignal, close, 1, Color.RED, Color.RED, "ATR Exit");
plot EMA = emaVal;
EMA.SetDefaultColor(Color.ORANGE);

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