Stock Gap Trading

Look for a 'jump' in price between yesterday's close and today's open. The gap appears as a space on the chart where no trading occurred. Compare today's first candle opening price (set by the 10:00 AM auction) with yesterday's closing price (the 4:10 PM CSPA close). Most charting platforms highlight gaps automatically.

No. Only trade gaps that meet your criteria: minimum size (>0.5%), clear catalyst (or lack thereof for fades), proper volume confirmation, and good risk/reward. Most gap traders take 1-2 trades per day maximum. Quality over quantity.

Gap up simply describes the opening condition (opens higher than previous close). Gap up follow is a trading STRATEGY - you trade in the gap direction (go long), expecting price to continue higher. The opposite would be gap up fade (short, expecting fill).

About 50% of gaps fill same day. About 70% fill within 3 days. However, strong breakaway gaps may not fill for weeks or months. Gap fill probability depends on gap type, catalyst strength, and volume.

Wait for the opening range to form (first 15-30 minutes, i.e. from 10:00 AM). Enter when price breaks the opening range in your expected direction. Avoid the first 5 minutes (too volatile) and the last 30 minutes / closing auction (reduced continuous liquidity and end-of-day volatility).

Pre-results: consider straddles if expecting a large move (where option liquidity allows). Post-results: wait for the opening range, assess the catalyst (beat/miss, guidance), check volume. Results gaps are often large but don't assume continuation - overreactions are common. The first reaction is frequently overdone if the gap is >5%. Remember Australian companies report half-yearly (Feb/Aug), with miner quarterly production reports in between.

Context is key. Exhaustion gaps occur after extended trends (20+ days in one direction), have extreme RSI, and quickly reverse. Breakaway gaps occur at pattern breakouts, have high volume with follow-through, and don't quickly reverse. Also check: was there a catalyst? Exhaustion gaps often lack one.

Both have merits. Index gaps (ASX 200 / SPI 200) are more predictable (driven by the overnight US close and commodities, read via the SPI 200 night session) but smaller. Stock gaps are larger and have clearer catalysts but are more volatile. Many traders focus on 1-2 stock gaps plus the SPI 200 for diversification.

Volume > 1.5x average supports a gap follow (conviction behind the move). Volume < 1.0x average supports a gap fade (no conviction). Check volume through the day - if it increases in your trade direction, conviction is building. Declining volume warns of potential reversal. Note that ASX volume concentrates in the opening auction and the CSPA, so mid-session reads can be thin.

Pre-event (unknown direction): long straddle/strangle where liquidity allows. Post-gap follow: ITM calls (gap up) or ITM puts (gap down) for high delta. Post-gap fade: put spreads (gap up fade) or call spreads (gap down fade) for defined risk. Note that ASX single-stock options are thin outside the big banks, BHP, and the XJO index, so many Australian traders use CFDs for leveraged directional gap exposure instead.

Collect historical gap data (size, direction, catalyst, fill rate, time to fill). Build features: gap size, volume ratio, pre-gap trend, sector context, A-VIX, market regime, overnight US move, relevant commodity move. Train a classifier for fade vs follow prediction. Backtest with walk-forward validation. Key metrics: win rate >50%, profit factor >1.5.

Island reversal: gap up, 1+ days of trading, then gap down (or reverse). Wait for the second gap to complete the 'island'. Enter in the direction of the second gap. Very high probability (~75%+). Target: full island range + extension. Stop: beyond the island high/low.

Bull market: favour gap up follows, gap down fades. Bear market: favour gap down follows, gap up fades. Ranging: favour fades for both directions. High A-VIX: reduce position size 50%, widen stops, expect larger gaps. Low A-VIX: standard strategies, tighter stops. Classify the regime weekly and adjust parameters.

Pre-market scanner (SPI 200 night session, US futures, commodities, ASX announcements). Opening gap detector with classification. Opening range calculator. Signal generator for entry triggers. Bracket order execution (entry + stop + target). Risk management (daily loss limits, max trades, capital/leverage caps). Backtesting framework for strategy refinement.

Pre-event: IV elevated, options expensive. Post-event: IV crushes (drops), hurting long premium. For post-gap options: use ITM (less IV-sensitive), enter quickly while IV is still elevated. For gap follow: buy ITM calls/puts with high delta. For gap fade: consider selling premium (benefit from IV crush) or use spreads. Note thinner ASX option liquidity widens spreads, which adds to effective cost.