This article introduces the "Gap-and-Trap," a specialized strategy for trading failed breakouts of overnight gaps in high-volume stocks. This setup is designed for traders who are active in the pre-market and opening bell, and who can capitalize on the initial volatility of the trading day.

This article introduces the "Gap-and-Trap," a specialized strategy for trading failed breakouts of overnight gaps in high-volume stocks. This setup is designed for traders who are active in the pre-market and opening bell, and who can capitalize on the initial volatility of the trading day.

Setup Description: The Gap-and-Trap

The Gap-and-Trap occurs when a stock gaps up or down significantly from the previous day's close, breaks out in the direction of the gap, and then quickly reverses, trapping the breakout traders.

Key Characteristics

• Significant Gap: A gap of at least 1% of the stock's price.
• The Breakout and Failure: The stock breaks out beyond the pre-market high/low, but the move fails to sustain.

Entry and Exit Rules

Entry Criteria

1. Gap and Breakout: A significant gap followed by a breakout.
2. The Reversal: Entry is triggered when a candle closes back inside the pre-market range.

Exit Strategy

• Profit Target: The gap fill (the previous day's close).
• Stop Loss: Placed just beyond the high/low of the failed breakout.

Risk and Money Management

• Risk per Trade: 1% of account equity.
• Position Sizing: Standard position sizing formula.
• Daily Stop: 2R daily loss limit.

Edge Definition

The edge of the Gap-and-Trap comes from the tendency of gaps to be filled. When a breakout in the direction of the gap fails, the probability of a gap fill increases significantly.

• Win Rate: 60-65%
• Profit Factor: (0.65 * 2.5) / (0.35 * 1) = 4.64