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A price gap is created when the market moves overnight and opens at a different level from where it closed the previous day. The gap refers to the cash market, so it is the difference in price between the cash close (17:30 CET time) and the cash open (9:00 CET).

Example: gap up 13th April

– the market moves higher overnight so it ‘gaps up’ at the open:

Example: gap down 19th March

– the market moves lower overnight so ‘gaps down’ at the open:

Ex-gaps

Ex-gaps use the same principle but use the high or low as the reference point. For example:

The market closes at 11300 and the high and the low of the day were 11350 and 11250 respectively.

  • If the market opens the next day at 11375, it creates a cash gap up of 75pts (Today’s open – Y’day close) and an ex-gap up of 25pts (Today’s open – Y’day high)
  • If the market opens the next day at 11220, it creates a cash gap down of 80pts (11300-11220) and an ex-gap down of 30pts (11250-11220)

How to trade them

  • Use unfilled gaps as profit targets
  • Fade gap and ex-gap and fill
  • aps stay unfilled until they are filled during cash hours and until that time they create reliable ‘magnets’ in the market to trade. G

Cash chart showing unfilled gaps

Futures gap

The same principle applies for the futures close at 22:00 CET. This level will often present a trade opportunity too, so you need to have this marked on your chart.

Links

Gap Trading Strategies

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