Gap openings in the morning can occur due to global market pressures, overnight global or local developments, sectoral or company based news, etc.
Gap openings are of 4 types:-
1) Gap-up opening during short-term uptrend
2) Gap-down opening during short-term uptrend
3) Gap-up opening during short-term downtrend
4) Gap-down opening during short-term downtrend
EXCEPT IN THE END OF THE SHORT-TERM TREND the first and forth are unlikely to be filled. The second and third are likely to be substantially faded or completely (even over).
So the second can be bought, the third can be shorted.
It is assumed that there is no major fundamental-changing development, otherwise gaps are unlikely to be faded or filled.
Positions should be squared off when the gap is filled. Also, larger the opening gap in second and third case, safer the trade.
Half of the gap should be taken as stop loss.
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