Gap Trading

Gap Trading

Trade price gaps by classifying gap type first -- different types require opposite strategies.

Identification

Distinguish a full gap (open above the prior high or below the prior low) from a body gap (open away from the prior close). State the exchange session, corporate-action adjustment, and overnight-trading treatment.

get_candles_around_date(symbol=<symbol>, exchange=<exchange>, interval="1D", date=<date>)

Compute both percentage gap and abs(Open - Previous Close) / prior ATR. Set the minimum from tick size, spread, and the instrument's historical gap distribution; do not use a universal percentage cutoff.

Gap Classification

Classify observable context rather than assigning universal fill rates:

Workflow

1. Detect and Classify

get_candles_around_date(symbol=<symbol>, exchange=<exchange>, interval="1D", date=<date>)
get_indicators(indicator_code="mfi", symbol=<symbol>, exchange=<exchange>, interval="1D")

Calculate both normalized gap measures. Compare volume with the same time-of-day baseline and document the catalyst from a primary source when available.

2. Check Trend Context

get_indicators(indicator_code="dmi", symbol=<symbol>, exchange=<exchange>, interval="1D")
get_indicators(indicator_code="ema", symbol=<symbol>, exchange=<exchange>, interval="1D")

Determine if ranging, starting trend, mid-trend, or extended trend to confirm classification.

3. Mark Gap Zone

draw_chart_analysis(action="create", drawing={
    "type": "highlight",
    "points": [
        {"time": <previous_close_time>, "price": <previous_close>},
        {"time": <gap_open_time>, "price": <gap_open>}
    ],
    "options": {"text": "<Gap Type> Gap (+/-X.X%)"}
})

4. Apply Strategy

• Fade: enter only after the predeclared reversal or failed-break trigger; use the prior close as a scenario target, not an assumed fill.
• Continuation: define an opening-range length in bars, enter on its closed-bar break, and invalidate on a tested return through the range or gap level.
• Compare several opening-range lengths in training data only and retain a rule only when it survives held-out costs.

5. Report to Orchestrator

Gap type and rationale, gap size, volume confirmation, strategy recommendation, gap boundaries, fill target, stop level.

Evidence and Validation

• Treat the setup as a testable hypothesis, not a prediction. Define thresholds, entry, invalidation, and exit before evaluating outcomes.
• Calibrate on the same instrument, venue, session, and timeframe. Use closed candles and a held-out or walk-forward sample; record every variant tried.
• Include spread, fees, slippage, borrow or funding, partial fills, and latency. Reject the setup when net expectancy is not positive or depends on one narrow parameter.
• Return observed inputs, missing data, cost assumptions, entry, invalidation, exit, and a valid, watch, or no-trade status.
• Research basis: Research on overnight versus intraday price formation supports treating the open as a distinct information period, not assigning universal fill rates to named gap types.

Key Rules

• Do not assume the open is noise or that a named gap type has a fixed fill probability.
• Use a time-stamped session definition and adjusted prior prices.
• Treat event-driven gaps separately and model opening-auction spread, slippage, and halt risk.
• A wider stop must reduce position size; never widen it solely to avoid an exit.
• Return no trade when the gap is too small relative to total execution cost.

Related Skills

• breakout-trading -- gap-and-go follows breakout principles
• momentum-trading -- breakaway gaps create momentum moves