What is a Candlestick Gap on a Stock? And How to Trade it

Have you ever open a chart and saw a huge space in between candlesticks? That is called a gap up if the gap is to the upside, or a gap down if the gap is to the downside.

Gaps on a stock also represent an important area of support or resistance.

Are Candlestick Gaps on a Stock Bullish or Bearish?

A candlestick gap on a stock is bearish if it was a gap down. A gap down on a stock may indicate a previous level of support has been broken and has now form a resistance level.

Also, candlestick gap down on a stock during a uptrend may indicate the end of it, or a reversal of the uptrend.

A candlestick gap on a stock is bullish if it was a gap up. A gap up on a stock may indicate a previous level of resistance has been broken and has now form a support level.

Also, candlestick gap up on a stock during a downtrend may indicate the end of it, or a reversal of the downtrend.

How Often do Gaps get Filled on Stocks?

Gaps have a 90% chance of filling on stocks in the future. Gaps also don’t have to fill.

Let’s look at an example of a gap being filled on a stock:

On the example above, on the first encounter, price action was able to fill the gap.

Let’s look at another example of price action encountering a gap on a stock on a daily timeframe:

On the example above, you can see price action encountering the gap on a stock, but then getting rejected.

It takes +30 days later in the future to fully fill the gap on a stock.

How to Trade Stocks that Are Going Fill the Gap?

If you want to trade the gap fill on a stock then you need to make sure you wait for confirmation before entering. You always want the edge on every single trade.

Here X steps to how to trade stocks that are going to fill the gap:

Step 1: Watch the Closing Candlestick on the 5 Minute Timeframe

You want to make sure that price action is closing above the entry level of the gap on a stock.

Also check if the closing of the candlestick is a strong continuation candlestick. The last thing you want is a consolidating candlestick such as a doji candlestick.

Step 2: Strong Buying Pressure

Price action staying above the entry level is great, but you want to make sure buying pressure is strong.

Look at the volume of the candlestick, is it high. If it’s not high, you may want to be cautious.

Step 3: Check for News

News for a stock is a great catalyst to give that selling or buying pressure to fill the gap.

You want to check if the stock you’re trading has price upgrades or downgrades.

Check if there’s any world wide events, that are in your favor as well.

As a trader, you must stay up to date with the news as much as possible to assure your trade goes accordingly.

Step 4: Check the Indices

The indices such as S&P 500 or Invesco QQQ have such a huge influence on the stock market. You have to see how they’re moving pre-market hours and during market hour to make sure the your gap on a stock trade goes well.

If the S&P 500 is falling hard, and you’re trading a gap up on a stock, there’s a good chance it may ruin your trade. Vice versa.

Step 5: Check the Strength of the Sector

When you’re trading a gap on a stock, you want to know the sector that stock is in. You want to make sure that the sector is strong on the gap up or gap down.

Typically, all stocks in a sector move the same.

Step 6: Check How Big Tech is Reacting

Big tech such as $AAPL, $AMZN, $META, $MSFT have a huge influence on the indices.

Which may lead to your gap trade on a stock may go against in your favor. Make sure to see that all is on your favor to assure you have a high confidence trade.