How do you treat price gaps like a price magnet?
Understand the context of the gap first:
The most common mistake is trying to sell or buy every gap as soon as it occurs. Ask yourself: Is this gap at the beginning of a trend (breakaway) or at the end (exhaustion)? Exhaustion gaps are excellent for countertrend trading (resisting the gap fill), while breakaway gaps call for trading with the trend, not against it.
Relying on a Gap Fill:
Many traders place pending orders at the first level of the gap, waiting for the price to return and fill it. When the price moves to fill the gap, a strong rebound opportunity often arises because the side that lost out on the news seeks to adjust its positions at the old price.
Careful Risk Management:
Gaps are characterized by sharp price jumps (slippage), which means a stop-loss order may be executed at a price much farther away than expected if the gap moves against your position. Always make sure to reduce your position size when trading near major news events that can create gaps.
