What Is Gap Trading?
Gap trading exploits price discontinuities. You either bet that gaps will “fill” (price returns to the gap area) or that they’ll continue (price keeps moving in the gap direction).
It’s a two-sided strategy: same setup can be a buy or sell depending on your thesis about whether the gap is exhaustion or continuation.
The Two Gap Trading Approaches
Gap Fill (Fade the Gap):
- Price gaps, you bet it returns
- Exhaustion gaps favor this approach
- Safer bet (higher historical fill rates)
- Smaller targets (back to the gap origin)
Gap Continuation (Follow the Gap):
- Price gaps, you bet it keeps going
- Breakaway gaps favor this approach
- Riskier bet (requires strong momentum)
- Larger targets (trend continues)
Gap Fill Trading
Setup:
- Price gaps (e.g., closes at 1.0850, opens at 1.0900)
- Identify gap type (exhaustion, common, or continuation?)
- If exhaustion or common, expect a fill
- Enter at the gap level (1.0900 in this example)
- Target: the gap open price (1.0850)
- Stop loss: beyond the gap (1.0920)
Example trade:
- Friday close: EUR/USD 1.0850
- Monday open: 1.0900 (50-pip gap)
- Thesis: Gap fill expected
- Sell at 1.0900, target 1.0850
- Stop loss: 1.0920
- Risk: 20 pips, potential reward: 50 pips (2.5:1)
Gap Continuation Trading
Setup:
- Price gaps strongly (large candle, high volume)
- Identify as breakaway gap (supports trend)
- Expect the gap to NOT fill
- Enter after confirmation candle
- Target: next resistance in the gap direction
- Stop loss: below/above the gap opposite side
Example trade:
- Downtrend in progress
- Price gaps down 80 pips on NFP
- Breakaway gap (high volume, strong momentum)
- Short EUR/USD at the gap price
- Target: next support 200 pips lower
- Stop loss: above the gap (100 pips)
- Risk: 100 pips, potential reward: 200 pips (1:2)
Gap Type Recognition
| Gap Type | Characteristics | Strategy | Fill Rate |
|---|---|---|---|
| Breakaway | At trend start, high volume, strong move | Continuation | 20% |
| Continuation | Mid-trend, reinforces direction | Continuation | 50% |
| Exhaustion | At trend end, largest move | Fill | 85% |
| Common | Random, low conviction | Fill | 70% |
Volume in Gap Trading
Volume is critical for identifying gap type:
- High volume on gap candle = institutional participation = likely continuation
- Low volume on gap candle = weak conviction = likely to fill
- Volume increasing after gap = momentum building = continuation
- Volume decreasing after gap = momentum fading = fill likely
Time Frame for Gap Fills
Gaps fill at different speeds:
- Exhaustion gaps — fill quickly (within hours to 1 day)
- Common gaps — fill within days to weeks
- Breakaway gaps — may never fill (if they do, it takes weeks or months)
Your trading plan should account for how long you’re willing to hold.
Opening Range Gap Trading
A specific gap trading method:
- Opening range = first candle of the day
- If open is far from previous close = gap
- Within first 2-3 hours, price often fills the gap
- Trade the fill at high probability
- Tight stops required (30-minute timeframe)
This is highly reliable for day traders.
Using Gap Trading in Your Journal
Track:
- Which gap types did you trade?
- How many filled? How many continued?
- What was your win rate on gap fill trades?
- What was your win rate on gap continuation trades?
- Did certain gap sizes work better?
- Which timeframes were most reliable?
- How long did fills take on average?
Common Gap Trading Mistakes
- Trading all gaps equally — identify the type first
- Ignoring volume — low-volume gaps behave differently
- Oversizing gaps — they can gap further in unexpected ways
- Not accounting for slippage — gaps create execution slippage
- Holding too long — if gap doesn’t fill in expected timeframe, exit
The Takeaway
Gap trading is reliable if you classify the gap correctly. Exhaustion gaps fill with high probability. Breakaway gaps continue with reasonable probability. Common gaps? Flip a coin.
Your edge comes from identifying which gaps are which, sizing appropriately, and executing with discipline. A trader who consistently fills exhaustion gaps with tight stops and good risk-reward is making reliable money.
Gap trading requires patience and precise execution, but it’s one of the most mechanical, testable strategies in forex.
