TL;DRThe price difference between one session's close and the next session's open. Small gaps tend to fill. Large gaps driven by news tend to continue.
A gap occurs when a futures contract opens at a different price than it closed. If ES closes at 5,200 and opens at 5,210, there's a 10-point gap up.
In futures, gaps typically form between sessions. True gaps are most visible between the Friday close and Sunday open, or between RTH close and next RTH open. The Globex session can partially fill gaps before RTH opens.
A gap fill occurs when price retraces back to the prior close after gapping away. Statistically, small and medium gaps fill more often than large gaps. Very large gaps driven by significant news tend to continue rather than fill.
Tracking gap fill statistics for your product gives a probability-based edge for early-session trades.
Gap fill trades fade the gap direction, expecting price to return to the prior close. Works best with small to medium gaps.
Gap continuation trades follow the gap direction. Works best with large gaps driven by catalysts.
Both approaches need a stop loss and defined invalidation. A gap fill trade is invalidated if price continues strongly in the gap direction.
RTH gap fill
ES closed at 5,200 yesterday. Opens at 5,212 today (12-point gap up).
A gap fill trade: short near the open targeting 5,200 (prior close). Stop above the opening range high. If ES pulls back to 5,200, the gap filled.
Large gap continuation
Major earnings miss overnight. NQ gaps down 200 points.
A 200-point gap with a fundamental catalyst rarely fills. Continuation (shorting) with a stop above 18,350 is more likely to work than fading.
Blindly fading every gap
Large gaps driven by news rarely fill. Check gap size relative to the average daily range and look for a catalyst.
Not having a stop loss on gap trades
A gap that doesn't fill can turn into a trend day. Always have a defined exit.
Using RTH close when Globex has partially filled the gap
Define which gap you're trading: full gap from RTH close or residual gap from Globex.