How do you treat price gaps as a price magnet?
First, understand the context of the gap:
The most common mistake is trying to sell or buy every gap as soon as it appears. Ask yourself: Is this gap at the beginning of a trend (a breakaway gap) or at its end (an exhaustion gap)? Exhaustion gaps are excellent for countertrend trades (resisting a gap fill), while breakaway gaps call for trading with the trend, not against it.
Relying on Gap Fills:
Many traders place pending orders at the initial level of a gap, waiting for the price to return and fill it. When the price moves to fill the gap, a strong bounce opportunity often arises because traders on the losing side of the news seek to adjust their positions at the old price.
Careful Risk Management:
Gaps can involve sharp price jumps (slippage), meaning a stop-loss order may be executed at a price far worse than expected if a gap forms against your trade. Always make sure to reduce your position size when trading near major news events that can create gaps.