Why Trade Gaps?

Why Trade The Opening Gap?

Trading gaps is not for everyone.  But for me, I consider the opening gap, the ideal trade setup.  They occur almost daily, offer plenty of profit opportunity, and are normally short term in nature (1-2 hours).  Gap trading offers many other compelling benefits including:

  • Gaps have an inherent bias and edge: over 72% of all gaps (in the S&P 500) have filled the same day over the past ten years.
  • They occur frequently (three to four tradable gaps per week in the S&P) so I am not reliant upon catching that “one big winner” to achieve my monthly goals.
  • It’s an easy trade to learn and play.  No need to “time” the entry – just use a market order at the open.
  • I can prepare in about 15 minutes before the market opens each day.  No need to scan hundreds of stocks at night.
  • I can trade them without charts and from anywhere.
  • No need to baby-sit lots of different markets waiting for that perfect, entry-sensitive trade to appear.
  • Getting filled with minimal slippage is not an issue – especially in highly liquid markets like the equity indices and futures markets (S&P 500, NASDAQ 100, etc.).
  • The target is pre-defined so I don’t have to manage the trade after placing it (though sometimes I do to maximize profits).
  • I am done trading in the morning on most days (if I want).
  • My risks are controlled and limited to a small percent of my account.  No overnight risk.
  • Gap trades work in bull and bear markets equally well.  I don’t need to predict the market’s next move.
  • They occur in most asset classes (equities, futures, currencies, etc.) and can be traded using stock, options, and futures contracts.
  • I can grow my account several percent per month on average, and often more with this single, simple setup using just one market.
  • Understanding the bias of the market before and after the gap fills, provides a trading edge for the rest of the day while also helping optimize my entries on swing and position trades.

Dr. Harry Schiller, a columnist for the TheStreet.com, may have said it best at the June, 2007 Moneyshow (paraphrased from online interview video):
“Gaps define the markets’ action, especially the S&P futures gap, on an intraday, daily, even monthly basis… very, very often. Whatever you are buying, you will do a better job, be more effective and more profitable, if you buy as those gaps are getting filled.  People who don’t pay attention to gaps, are just missing the boat!”

To see the video and learn more on how Dr. Schiller uses gaps in his daily decision-making, click here.