Buy the edge of the gap, never the middle

You trade a gap pullback by treating the open gap as one block of support. Then you buy near one of its edges. For a down gap, flip it: the block is resistance and you sell near an edge.

The usual mistake is buying the moment price enters the gap. It feels like a discount. But price sliding into the box hasn't shown you anything yet. Buyers may be waiting at the top edge, or they may only show up at the bottom.

The middle of the gap is the worst place to decide. There's no level there, just empty space price skipped on the way up. If you buy mid-gap and price keeps sliding, you have nothing to lean on until the bottom edge. And your stop still has to sit below that edge.

So the question is which edge, and that comes down to arithmetic.

Picture an up gap on the daily chart. The bottom edge is the high of the candle before the gap. The top edge is the low of the candle after it. Draw the box between those two prices, on regular trading hours only.

While the gap stays open, the whole box is support. A pullback can turn at the top edge or run all the way to the bottom edge. Both are normal.

The bottom edge is the major level. That's the last price before the market jumped. The box stays open as long as candles don't close below it. Your stop belongs on a close below that edge.

For a down gap, mirror everything. The box is resistance and the top edge is the major level. A close above it ends the trade. A falling gap you're selling into works on the same arithmetic as below.

Here's an example with made-up prices. An up gap runs from 96.20 to 98.00, so it's 1.80 wide. Your target is the recent high at 101.00. Say a daily close below the gap would get you out near 96.00.

Buy at the top edge, at 98.10. Risk is 98.10 minus 96.00, or 2.10. Reward is 101.00 minus 98.10, or 2.90. That's under one and a half to one, so it fails.

Buy near the bottom edge, at 96.40. Risk is 0.40 and reward is 4.60, well over two to one.

The cutoff is two times the stop plus the target, divided by three. That's 192.00 plus 101.00, or 293.00, divided by 3, which is 97.67. Above that price, this trade can't pay two to one. So a wide gap usually means waiting for the bottom edge. A narrow gap can make the top edge work.

A daily gap is closed only by a daily close beyond the far edge. A higher timeframe close counts too. An hourly close below the bottom edge does not, and neither does a wick.

That rule protects you from the shakeout. Price often stabs below the bottom edge during the day and finishes back inside. If your stop sat one cent under the edge, you were out for nothing.

The cost is that you have to act near the close. Decide in the last part of the session, not at noon on a scary candle. With shares, waiting for that close costs you nothing in time. With short-dated options, every hour of waiting eats premium, so a wide gap is harder to hold.

Once a daily candle closes through, the box flips. The old support becomes resistance. The next rally into it is a place to look for shorts.

The tempting trade is shorting a stock as it pulls back toward an up gap, because gaps get filled. While that gap is open, you're selling straight into support. Nothing makes a gap fill on schedule, and some stay open for a long time.

Turn it around instead. An open gap above or below price can be a target for a trade coming from somewhere else. Say you buy at a lower support. The bottom edge of a down gap overhead is a sensible place to take profit.

Sometimes a gap edge sits close to another level, such as a hammer low. Treat the two as one zone. Inside that zone, do nothing. Act once price holds clearly above it or closes clearly below it.

Pull up the last up gap on a stock you follow and draw it as a box tonight.

Draw the gap as a box from the candle before it to the candle after it. Note the timeframe you found it on. Mark the far edge as the major level.

Find your target, such as the recent high or the next level. Work out the cutoff price where the trade still pays two to one. Decide which edge sits on the right side of that cutoff.

Wait for price to reach that edge and hold it. Enter near the edge, never in the middle of the box. Size the position from the distance to the stop.

Exit on a close through the far edge on the gap's own timeframe. If that happens, redraw the same box as resistance and watch the next rally into it.