The Gap and Go strategy is one of the most powerful day trading strategies during market open. If done right, it can be so effective that you can finish your trading day after 30-60 minutes of trading. In this tutorial, you will learn how to trade, identify, and interpret the Gap and Go pattern the right way.
Gap and Go strategy advantages
Gap and Go strategy disadvantages
An overnight gap measures the difference between yesterday’s market closing price and today’s opening price.
The most popular scan logic includes today’s pre-market stock price movement but does not include yesterday’s after-market stock price movement.
Being early is a big plus in this strategy because you will be thoroughly prepared once the official market open happens. The perfect preparation is the key to success here.
Monitoring the price movement after the open is crucial. I will explain the details in the next section.
Identify, interpret and trade the Gap and Go strategy
Identify & interpret the pattern:
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Open Trade Ideas Pro A.I.
Use the "Trade The Gap" channel and feel free to configure some additional columns.
The most important columns are: Price, Gap %, Gap $, Today’s trading volume.
Congratulations. You have created your Gap and Go pattern scanner in under 60 seconds. Your scanner should now look like this:
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Trade the Gap and Go pattern
As I mentioned before, Trade Ideas Pro A.I. will make your life much easier. You can configure your Gap and Go scan any way you want, monitor the price developments, and sort your scan table at any time.
Hunt the market instead of being hunted by the market.
Here is what is most important in trading the Gap and Go strategy
During the pre-market hours, NYSE and NASDAQ are already open for trading stocks. In many cases, the trading volume is low at this time. But there are exceptions, like the first pre-market period after earnings announcements.
Trading the Gap and Go strategy requires acting at the market open or after the market open but not before the market open. The time during the pre-market hours is only needed to spy on what the prices are doing.
Why is that?
Because the gap is defined by the price difference between the first tick of the regular trading time in relation to the last tick of the previous trading day within the regular trading time.
Usually there is a huge gap shown in the pre-market, but once the market opens the gap is not there anymore.
It doesn’t matter how high the pre-market volume is during the pre-market trading time. But once the market opens things go fast.
That’s why it is important to have a high quality stock market scanner like Trade Ideas. It is hard to monitor thousands of stocks each day manually.
Even the best broker platform can’t do a good job here. Trade Ideas scans the whole market with thousands of stocks for each trading pattern you define. And they have defined scans as well.
Gap and Go – The name explains what the strategy means
If the market gaps up, we are looking for a long trade (buying the stock).
If the market gaps down, we are looking for a short trade (selling a stock we do not have at the moment).
That being said, we are looking for a continuation of the momentum the stock gained overnight. The Gap and Go strategy is not a reversal strategy, it is a continuation strategy.
Does it matter why the stock gaps up or down at market open?
The most common reason for a gap on individual stocks is news regarding earnings announcements and company news, while general market news can have an impact on the whole financial market.
When looking for a Gap and Go strategy with high continuation momentum of the gap-direction, you have to know why the stock gaps. If there is only general market news or an unknown reason, keep your fingers far away from any buy or sell order.
You have to know the reason to be able to evaluate if the news has enough power to continue the price movement. Remember, it is always about supply and demand.
You have to avoid being the last person in the queue before prices change direction.
And please remember. News causes movement. Not technical setups itself. Many day traders simply trade a boring breakout or breakdown. But if there is no news behind it, then the move will end fast or the markets will just go sideways.
The key point is, the price movement should be supported by major news. Scanning for news is easy with TheFly.com, Briefing.com or Benzinga.com.
Most other news sites have delayed news data which is worthless when trading real time. The news always comes before the Gap & Go price movement, not vice versa.
How to day trade the Gap and Go strategy
Below, you will find some classic ways to trade the Gap and Go strategy. All of the entry strategies are based on technical analysis, while the news causing the move is based on fundamental news.
All of those strategies should be traded only during the first 30 to 60 minutes of the regular trading hours. I usually trade this strategy only with NASDAQ and NYSE listed stocks.
In case you want to trade other markets, you should analyze typical price movements first to evaluate if the strategies can be applied. Day trading penny stocks with the gap and go strategy is possible if the volume around the market open is high enough to place your trade.
Long Strategy 1: Gap & Go Range Breakouts
Examples for trading the breakout:
Long Strategy 2: Gap & Go Pullback
Examples for trading the pullback to the long side:
All of those strategies can be traded the mirrored way on the short side as well. But remember, shorting stocks is riskier than only trading long. Furthermore, not every broker provides you the ability to short stocks.
Short Strategy 1: Gap & Go Range Breakdowns
Examples for trading the breakdown:
Short Strategy 2: Gap & Go Pullback
Examples for trading the pullback to the short side:
Valuable additional scanner settings:
There are some valuable scanner settings you could use to filter for less candidates.
- Filter for a minimum gap up or gap down, +4% or -4%, like Ross Cameron from Warrior Trading does.
- Filter for minimum traded volume at the current day. Higher volume means less spread, less slippage and better fills, which is good.
- Integrate a price and spread filter to assure that you avoid trading "spready stocks" with awful trade executions.
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About the Author
Alexander is an investor, trader, and founder of daytradingz.com. After devoting many years to educating himself on powerful day trading techniques and effective investment styles, he started trading and investing more actively. In the past 20 years, he has executed thousands of trades. In 2015, he began writing articles about trading, investing, and personal finance. He is very passionate about sharing his knowledge and strives for success in himself and others. Alexander has been featured on Benzinga, Rockstar Finance, and ESI Money.