The Common Gap Trading Strategy focuses on taking advantage of typical price gaps that occur without any major news catalysts, often during periods of market consolidation or within established trading ranges. These gaps—known as common gaps—are not usually accompanied by high volume and tend to fill quickly, making them ideal for short-term mean reversion trades.

This strategy is particularly suited for day traders, swing traders, and index traders who specialise in range-bound markets and gap-filling behaviour.

What Is a Common Gap?

A common gap is a price gap that:

• Occurs within a consolidation or trading range
• Lacks a strong news driver (unlike breakaway or exhaustion gaps)
• Is usually small to moderate in size
• Fills quickly—meaning price returns to the previous day’s close

Common gaps reflect temporary imbalances or overnight sentiment that do not have strong follow-through potential.

Why This Strategy Works

• Markets tend to revert to the mean in the absence of new information
• Many common gaps are filled within the same trading session
• Lack of institutional volume behind the gap increases the likelihood of reversal
• Offers predictable risk-reward setups with clear entry and exit points

This makes common gap trading low-risk, high-reliability, especially when combined with technical confirmation.

How to Trade the Common Gap Strategy

1. Identify a Valid Common Gap

Check the chart pre-market:

• Look for a small gap up or down within an existing range
• No major news, earnings, or macroeconomic catalyst
• Price should be gapping into a previous support or resistance zone

Mark the prior day’s close, which becomes the gap-fill target.

2. Confirm It’s Not a Breakaway or Exhaustion Gap

Avoid trading common gaps that:

• Occur on high pre-market volume
• Come with significant news or earnings
• Appear after a strong trend and could indicate exhaustion
• Break out of long-standing support/resistance levels

Stick to low-volume, low-emotion gaps within a tight range.

3. Wait for Opening Rejection or Reversal Signal

After the market opens:

• Monitor 5M or 15M charts for rejection candles (pin bars, dojis, engulfing patterns)
• Wait for price to stall or fail near the open level
• Look for confirmation like RSI divergence, VWAP rejection, or failed breakout

Only enter once price begins to revert toward the gap-fill zone.

4. Enter the Trade

Gap Up (Fade Short Setup):

• Enter short on bearish confirmation
• Target = previous close (gap fill)

Gap Down (Fade Long Setup):

• Enter long on bullish confirmation
• Target = previous close

Stop-Loss:

• Just beyond the day’s high (for short) or low (for long)
• Or behind the confirming candle

Take-Profit:

• Full gap-fill (yesterday’s close)
• Partial profit at mid-gap level if price stalls

5. Use Confluence for Better Accuracy

Enhance your setup by aligning with:

• Key support/resistance levels
• Moving averages (e.g. 20 EMA or 50 EMA)
• Low ATR environments (where price tends to revert rather than trend)

This increases the likelihood of a clean fill.

Strategy Summary Table

Component	Details
Gap Type	Common (within range, no catalyst)
Trade Direction	Fade the gap (mean reversion)
Entry Trigger	Price rejection + reversal candle
Stop-Loss	Beyond gap extreme or reversal bar
Take-Profit	Previous close (full gap fill)
Timeframe	5M–15M intraday; 1H–4H for swing trades
Best Use Case	Quiet markets, consolidation phases

Example: Common Gap Fade on the NASDAQ

• NASDAQ opens 0.4% higher with no major overnight catalyst
• Price stalls near open and forms bearish engulfing on 5M
• Trader shorts with stop above opening high
• Price reverses and fills the gap to the prior close within an hour
• Clean 1.5R gain with tight risk

Conclusion: Trade the Gaps That Markets Forget

The Common Gap Trading Strategy is a simple but highly effective approach for traders who thrive on structure and predictability. By targeting non-news-driven gaps that are prone to mean reversion, you can build a reliable edge in intraday and short-term swing trading.

To learn how to master common gap setups and refine your technical execution, enrol in our Trading Courses at Traders MBA and level up your strategy with market-tested techniques.