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%), a clear catalyst (or lack of one 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 the 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 a gap up fade (short, expecting a fill).

Roughly half of gaps fill the same day and about two-thirds fill within three days (illustrative, not guaranteed). 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 from the 08:00 open). Enter when price breaks the opening range in your expected direction. Avoid the first 5 minutes (too volatile) and the last 30 minutes before the 16:30 close plus the closing auction (reduced liquidity and end-of-day volatility).

Pre-results: consider index straddles if you expect a large market move. 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 over 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 global factors and the FTSE future) but smaller. Stock gaps are larger and have clearer catalysts but are more volatile. Many traders focus on 1-2 stock gaps plus the FTSE 100 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 throughout the day - if it increases in your trade direction, conviction is building. Declining volume warns of a potential reversal.

Pre-event (unknown direction): a long FTSE 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. Use weekly (Friday) options for same-day trades and monthly for multi-day. For single names, UK retail usually uses CFDs or spread bets rather than illiquid single-stock options.

Compile a historical gap database (size, direction, catalyst, fill rate, time to fill). Segment it by gap size, volume ratio, regime and catalyst, then build a transparent decision table that maps each bucket to its observed fill-vs-extend frequency. Keep it rule-based and auditable - no machine learning and no automated screening. Backtest the rules manually in simulation with out-of-sample periods; target a win rate above 50% and a profit factor above 1.5.

Island reversal: gap up, one or more days of trading, then gap down (or the reverse). Wait for the second gap to complete the 'island'. Enter in the direction of the second gap. It's a high-probability setup. Target: the full island range plus extension. Stop: beyond the island high/low.

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

AlgoKing is an educational simulation tool and does not automate live trading. Build a manual routine instead: a fixed pre-market sequence (FTSE future, overnight global markets, RNS at 07:00), a simple rule-based gap filter (gap % and volume), a written rules checklist for fade vs follow, manually prepared bracket orders (entry + stop + target), daily loss and trade-count limits, and a trade journal. Rehearse the whole process in simulation before risking capital - the edge is discipline and consistency, not automation.

Pre-event: IV is elevated, options expensive. Post-event: IV crushes (drops), hurting long premium. For post-gap options use ITM (less IV-sensitive) and enter quickly while IV is still elevated. For a gap follow, buy ITM calls/puts with high delta. For a gap fade, consider selling premium (benefit from the IV crush) or use spreads. FTSE 100 index options are the liquid retail venue for this.