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 with yesterday's last candle closing price. 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). Enter when price breaks the opening range in your expected direction. Avoid the first 5 minutes (too volatile) and last 30 minutes (reduced liquidity and end-of-day volatility).

Pre-earnings: Consider straddles if expecting large move. Post-earnings: Wait for opening range, assess catalyst (beat/miss, guidance), check volume. Earnings gaps are often large but don't assume continuation - overreactions are common. First reaction is frequently overdone if gap >5%.

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 are more predictable (driven by known US/global factors and commodities) but smaller. Stock gaps are larger and have clearer catalysts but are more volatile. Many traders focus on 1-2 stock gaps plus the S&P/TSX 60 via SXF futures or the XIU ETF for diversification.

Volume > 1.5x average supports gap follow (conviction behind move). Volume < 1.0x average supports gap fade (no conviction). Check volume throughout the day - if volume increases in your trade direction, conviction is building. Declining volume warns of potential reversal.

Pre-event (unknown direction): Long straddle/strangle. 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. Canadian equity options trade on the Montreal Exchange at 100 shares per contract; use weekly options (where listed) for same-day trades and monthly for multi-day. SXO options give S&P/TSX 60 index exposure.

Collect historical gap data (size, direction, catalyst, fill rate, time to fill). Build features: Gap size, volume ratio, pre-gap trend, sector context, VIX, market regime. Train 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 direction of second gap. Very high probability (~75%+). Target: Full island range + extension. Stop: Beyond island high/low.

Bull market: Favor gap up follows, gap down fades. Bear market: Favor gap down follows, gap up fades. Ranging: Favor fades for both directions. High volatility (elevated US VIX, or VIXC the S&P/TSX 60 VIX): Reduce position size 50%, widen stops, expect larger gaps. Low volatility: Standard strategies, tighter stops. Classify the regime weekly using the S&P/TSX Composite's 200-DMA trend and adjust parameters.

Pre-market scanner (US index futures, SXF, global markets, commodities, news). 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). 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 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.