What is the strategy for trading a common gap?

The strategy for trading a common gap involves taking a position counter to the direction of the gap and closing once the gap is filled. Common gaps, which often occur in a stock's chart when there is little or no trading activity, are typically filled as the market normalizes after the initial price movement. This phenomenon arises because prices tend to revert back to previous levels, allowing traders to capitalize on quick reversals.

By taking a position against the direction of the gap, traders anticipate that the price will retrace and fill the gap in order to complete the price discovery process. Once the gap is filled, the trader can close the position, ideally at a profit. This strategy relies on the historical tendency of common gaps to be filled rather quickly, making it a tactical approach for short-term trading. Thus, opting to take a position counter to the gap direction aligns with market behavior, and effectively allows for profit taking as the price retraces.