Key Takeaways
- Gaps occur when prices jump between closing and opening—about 60% fill within a short period
- Not all gaps behave the same: common gaps often fill, breakaway gaps may not
- Extended hours trading has made gap behavior less predictable
What is Gap Trading?
Client Question: "I noticed stocks often come back to where they closed yesterday. Can I make money from that?"
A "gap" occurs when a stock opens at a significantly different price than it closed the previous day. Gap traders try to profit from these overnight moves.
Types of Gaps
| Gap Type | Description | Fill Tendency |
|---|---|---|
| Common gaps | Small gaps in normal trading ranges | Fill quickly |
| Breakaway gaps | Gaps that signal start of new trends | Often don't fill |
| Continuation gaps | Gaps in the middle of trends | May or may not fill |
| Exhaustion gaps | Gaps at the end of trends | Typically fill |
The Gap Fill Statistics
Research on S&P 500 (SPY/ES) gap behavior shows:
| Finding | Statistic |
|---|---|
| Gap fill rate (6-month period) | ~60% of gaps filled |
| Small gaps (0.5-2%) | Majority close within two days |
| Fill pattern | Similar for gaps up and gaps down |
But the devil is in the details:
| Factor | Impact |
|---|---|
| Gap size | Smaller gaps fill more reliably |
| Gap type | Breakaway gaps often don't fill—they signal structural change |
| Extended hours | Pre-market trading has made gaps less predictable |
| News-driven gaps | May not fill if driven by permanent information |
Common Gap Trading Approaches
Gap Fill Strategy:
- Bet that gaps will "fill"—price returns to previous close
- Works better for common gaps in established ranges
- Can fail badly when gap represents new information
Gap Continuation Strategy:
- Bet that gaps indicate strong momentum that will continue
- Works better for breakaway gaps with high volume
- Requires distinguishing genuine breakouts from fakeouts
Why Gap Trading Seems Appealing
Gap trading appears systematic and rule-based:
- "Gaps always fill" (they don't always)
- "Just fade the gap" (simple rules, clear entry)
- "Gaps are predictable" (pattern recognition)
This mechanical appearance attracts traders who want formulas rather than judgment.
The Reality Check
| Misconception | Reality |
|---|---|
| "Gaps always fill" | Gap-fill rates vary by market, timeframe, and gap type |
| "It's a simple strategy" | Requires distinguishing gap types in real-time |
| "Extended hours don't matter" | Pre-market trading has changed gap dynamics significantly |
| "News gaps fill like normal gaps" | Permanent information may never "fill" |
Extended Hours Complication
Modern markets trade nearly 24 hours, which affects gap trading:
| Period | Impact on Gaps |
|---|---|
| Pre-market (4am-9:30am ET) | Much of the "gap" move happens here |
| After-hours (4pm-8pm ET) | News reactions occur when regular traders can't act |
| Overnight (8pm-4am ET) | Global events can move US prices |
What looks like a gap at the open may actually be a continuation of a move that happened in extended hours.
Professional Framing
When clients ask about gap trading:
"Gaps do fill more often than not—research suggests around 60% of the time for broad market indices. But that still means 40% of gaps don't fill, and the gaps that don't fill are often the ones driven by important new information. Common gaps—small moves within a range—tend to fill. Breakaway gaps—moves that signal new trends—often don't. The challenge is distinguishing between them in real time, before you know how the story ends."
What This Means for Clients
| If a client says... | Consider discussing... |
|---|---|
| "Gaps always fill" | The 40% that don't, especially news-driven gaps |
| "I have a gap strategy" | How they distinguish gap types |
| "It's easy money" | Extended hours and the complexity of modern markets |
According to research on the S&P 500, approximately what percentage of gaps fill (price returns to previous close)?
Which type of gap is LEAST likely to fill and may signal the start of a new trend?
The Strategy Enthusiast
A client excited about a trading strategy they learned online
Setup
A client comes to you having watched videos about a specific trading strategy (momentum, gap trading, etc.) and wants to implement it. They're enthusiastic but may not understand the full complexity.
Client says:
“I found this amazing strategy on YouTube for trading morning gaps. The guy shows his trades and he makes it look so easy—just buy when stocks gap up and sell by lunch. He's got 500,000 subscribers, so he must know what he's doing. I want to start doing this with about $15,000. Can you help me set it up?”
Practice Objectives
- 1Acknowledge their research without dismissing their interest
- 2Explain survivorship bias in trading content creators
- 3Discuss the gap between demonstrated trades and actual results
- 4Ask questions about their understanding of risk management