Fill The Gap Stock Trading: A Complete Guide

example of a gap fill trade

What Is A Gap Fill In Stock Trading?

Gap fills in stock trading is when a stock opens at a higher price than the previous day closed at or when a stock opens at a lower price than the previous day closed at. So for example, if Tesla closes the previous day at $404 and then opens the next day at $415, there is a gap in price that happened overnight.

Filling the gap is a common strategy that many day traders use under the expectation that the stock will return to the previous day’s close price. You can trade this expectation by either trading in the direction of the previous day’s close assuming that it will fill that gap or waiting for the gap to fill and then trading the reversal off of the previous day’s close. Many times the gap will fill in the first few hours of trading, but sometimes the stock is very bullish or very bearish and it does not fill the gap. If you are still learning the basics of day trading, gap fills are a great way to start out your trading journey, so make sure to study this strategy in depth on your own charts to get the hang of it.

What Causes Gaps?

Gaps are caused by traders adjusting their fair value for the price of the stock overnight while the stock market is closed. This adjustment can also happen during premarket hours as well. Often, the cause of these gaps is due to earnings reports, high impact news, partnership or acquisition announcements, or other reported news that affects the price of the stock while the market is closed.

It is important to note that smaller gaps can also appear in price during the trading day dues to various reasons such as extremely bullish or extremely bearish sentiment from traders expecting a big move or even a trader with large sums of money placing market order trades when there are no other limit orders nearby for them to buy or sell into. But for this article, we are going to focus on the more tradeable and probable gap fills that happen overnight or between trading sessions.

How To Trade Gap Fills

There are various ways to trade gap fills and they don’t always act the same, so we will go over two different strategies that are the most reliable so you can use them based on how the market reacts to those gaps. Remember, gap fill trading is a form of trend trading, so stick to trading the gap fills in the direction of the trend for best results.

Trading The Reversal After Filling The Gap

The most popular way to trade gap fills is to wait for the price of the stock to return to the previous day’s close price and then trade the reversal off of that level. This happens quite often and is a viable trading strategy if you can be patient enough to wait for the gap to fill and some days not be able to place trades if your watchlist of stocks does not have any gaps to fill.

Once the gap has been filled, it is important to wait for a pivot to be made so you don’t enter and then the stock keeps going in the same direction. So wait for the pivot to be made and then place your entry, with a stop loss below that pivot point. Then look for the stock to return to the open price for the day or the day’s high or low and use those as your target levels to take profit at. Make sure to trail your stop loss along the way as the stock moves in favor of your trade so you don’t let a winning trade turn into a losing trade.

Many times stocks will range in a sideways market until the news is announced and won’t give any gap fill opportunities, but outside of that, you can typically find a decent amount of stocks with gaps to fill if you watch enough stocks. Just make sure to stick to large cap stocks so there is plenty of liquidity for you to be able to efficiently enter and exit your position without much slippage.

example of gap down and gap up trades

Trading Breakaway Gaps

When a stock gaps up or down and then continues that direction, if it is a very strong trend, it may not fill the gap at all. In this situation, you need to look for the stock to move in the same direction as the gap just after the market opens and then wait for the stock to come back to the day’s opening price and form a pivot there. Once that pivot forms, you can place your entry in the same direction that the market was trending and then ride that move until it starts to form a reversal pivot. Place your stop loss just beyond the pivot that was made at the day’s opening price and then make sure to trail your stop loss as price moves in your favor.

You can also help to confirm your entry by looking for volume spikes when the stock returns to its opening price and forms its pivot. Volume spikes are a good indication that many other traders are also entering in that spot and looking to ride that trend direction, so keep an eye out for this to add extra confluence to your entry strategy.

example of breakaway gap being filled and bouncing off of open price

What If The Gap Is Filled And Price Keeps Going?

Sometimes when the trading gap fills, the gap will get completely filled and then continue on. This is typically when the gap up or gap down was met with a lot of resistance and doesn’t have enough traders that believe in the continuation, so the stock fills the gap and then continues in the opposite direction of the gap. When this happens, you need to make sure you get out of your position and wait until the next day or look for other stocks that actually form a pivot once the gap is filled. This is why we mentioned earlier that you should always wait for a pivot to be formed before taking your trade, otherwise you are entering your position on what is called a falling knife which can be very dangerous.

example of a gap being filled and price keeps going

Do Stocks Need to Fill Gaps?

Stocks don’t need to fill gaps all the time. When the market is trending strongly in one direction, many times the price action will only return to the market open price and then continue its trend, leaving all of the traders that were waiting for the gap to completely fill stuck without a trade so they end up chasing price instead. Never chase price, always stick to your strategy and if your strategy does not appear that day, then sit on the sidelines and wait until the next day to find a good gap fill setup.

As we mentioned in the strategy about breakaway gaps earlier, look for a pivot and volume spike when the stock returns to the open price and trade that instead. If price does not return to the open price and just rockets out of there, do not trade that as it is likely that the market will swing wildly and stop you out. Remember, preserving your capital is just as important as winning trades, so always use proper risk management when trading and stick to your plan, even if your ideal setup doesn’t appear that day. Patience is key in trading and it will be your most important step to consistently profitable trading, so don’t overlook it.

How To Mark Up Your Charts For Gaps

When marking up your charts for gaps, you can either manually draw boxes on your chart or you can use one of your favorite gap fill Tradingview indicators to do it for you automatically. If you are marking your charts manually, you want to find the close price of the previous day and then find the open price of the current day after the market opens. It is best to leave out premarket data and only use data from normal market hours for best results.

When the market opens higher than the previous day’s close price, this is a gap up and we will be looking for long trades to enter from within the gap. Draw a box from the previous day’s close price, up to the current day’s opening price and then extend that box to the right for the rest of the trading day. If the market gaps up like this, color your box green to show you that the market will likely bounce back up after filling the gap.

When the market opens below the previous day’s closing price, this is a gap down and we will be looking for short trades from within the gap. Draw a box from the previous day’s close price to the current day’s opening price and extend the box to the end of today’s trading hours. Color the box red to signify that you are looking for a short from the gap.

Get Trading Tips Sent To Your Inbox

Join our newsletter to get free trading tips about the markets, our indicators and updates from us. Just drop your email below and you’ll get the goods as they come out of the oven :)

By signing up, you agree to our Privacy Policy.