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Gap and go

A strategy of trading in the direction of a large opening gap when price holds its level and breaks the opening range.

The setup is the opposite of a gap fade. On a large, news-driven gap, the trader waits for the first minutes to establish an opening-range and enters if price breaks the range in the gap's direction, with a stop on the other side.

It suits the situation where the gap reflects genuine repricing: the market has new information, the old range is irrelevant, and the path of least resistance is continuation. relative-volume well above normal is the usual filter.

The risks are specific and large. Spreads are wide at the open, slippage is worst in exactly these conditions, and reversals in the first thirty minutes are violent. Position size should be reduced, not increased, in this environment despite the temptation.

Related: gap-fill, opening-range, breakaway-gap, relative-volume, slippage

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

A range beside a trendOne chart swinging between a flat floor and ceiling, another stepping upwards inside a pair of sloping lines.Range-boundresistancesupportprice bounces between two levelsTrendingthe trend channelhigher highs and higher lowsA range has two flat edges; a trend has two sloping ones.
Range versus trend. On the left price keeps bouncing between the same floor and ceiling, which is a range. On the right each high and each low is higher than the last, inside a pair of sloping lines called a channel.
Slippage on a market orderA buy order clears four price levels, so the average price paid is worse than the price first quoted.Buy 1,000 shares at marketpricesell orders resting (bar length = size)20.04300 shares20.03200 shares20.01200 shares20.00300 sharesnothing resting at 20.02order sweeps up the bookaverage fill 20.02SLIPPAGE0.02 a share$20.00 in totalintended 20.00Each level fills at its own price; the average is what you really paid.
Slippage on a market order. You click at 20.00, but only 300 shares are resting there, so the rest of the order fills at 20.01, 20.03 and 20.04. The average price paid is 20.02, and that two-cent gap is slippage.

Educational only, not advice. Spotted an error? Post in Site Feedback.