Use the following rules when the market opens with a true gap:
1. Go with all gaps that don’t fill right away. If early trade doesn’t start to correct the imbalance, prices will probably move into the gap.
2. Significant gaps can often fail to fill on the first day or may fill only partially. Determining gap size is a matter of context, Average True Range, etc.
3. If the gap fills (meaning the previous day’s regular session high is touched on a gap up or the regular session low is touched on a gap down), and the Value Area cannot get to at least overlapping, then the odds of a late-day rally (on a gap up) or late-day selloff (on a gap down) increase.
4. Avoid large gaps early in the day – they are difficult to trade. The market usually tends to pin in a tight range to “digest” the overnight move. Day traders should focus on individual stocks rather than futures for more playable movement when this happens.
5. Aggressive traders can short the first one minute low or cross back down through the open should the opening drive be higher. Target the previous day’s regular session high for the gap fill. This also works in reverse on a gap down. While this sounds easy, it’s not easy to pull off as per gap rules #2 and #4.