9.1 Gaps
A gap occurs when price opens or resumes trading by jumping across the previous candle close, creating a price area with no transaction record.
Common causes:
- Overnight stock news.
- Earnings or major events.
- Pre-market trading.
- Low liquidity.
- Concentrated emotion release.
Gap edges can be observation boundaries, but the inside of the gap is a transaction vacuum. Chasing inside gaps requires attention to slippage and execution risk.
Different markets treat gaps differently:
- Stocks have clear open and close.
- Futures trade longer hours but can still gap due to breaks or contract roll.
- Crypto trades 24/7, so traditional gap concepts must be used carefully.
Do not judge a gap only by direction. Judge whether the market accepts the new price area:
- After an upside gap, if price holds above the upper gap edge and does not fill the gap on pullback, buyers are accepting the new range.
- After an upside gap, if price quickly falls back into the gap, chasing demand may be weak and the gap may become a failed breakout.
- After a downside gap, if rebound cannot reclaim the lower gap edge, selling pressure still dominates.
- After a downside gap, if price quickly fills the gap and returns to the old range, panic may have been absorbed.
The middle of a gap is not a good place to chase blindly. The useful observation points are usually the upper edge, lower edge, reaction after fill, and whether later candles accept the gap.
9.2 Order Types
Trade plans eventually become orders. Without understanding order types, analysis can fail at execution.
Market order:
A market order seeks immediate execution at available prices. It is fast but slippage is uncontrolled, especially in low liquidity, high volatility, or thin order books.
Market orders fit situations where immediate exit or immediate execution matters more than exact price, and where order-book depth can absorb your order. Market orders do not fit fast-moving prices, suddenly wider spreads, thin books, fresh news, or order size that is large relative to available depth.
Limit order:
A limit order specifies the price you are willing to buy or sell. It gives price control but may not fill or may fill partially.
Limit orders fit planned entries near a prepared price and help control execution cost. But if the trade logic requires an exit, a limit order is not guaranteed protection. If price moves through the limit without filling, the risk remains in the account.
Stop order:
A stop order triggers at a price and then becomes a market order or other execution type. It helps exit when price moves against you, but actual fill may be worse during gaps or fast markets.
Stop orders fit “must exit” risk control, but they do not guarantee the trigger price as the fill price. Position sizing should include possible slippage, not only the stop trigger.
Stop-limit order:
After trigger, it becomes a limit order. It avoids very poor fills but may not execute if the market moves through the limit.
Stop-limit orders fit cases where you would rather not fill than accept a very poor price. They are not ideal as disaster protection, because in extreme markets “not filled” may be the larger risk.
Trailing stop:
A trailing stop adjusts as price moves in your favor. It helps lock profit in trends, but if set too tight it can be hit by normal volatility.
Trailing stops must match instrument volatility. Too tight treats normal pullbacks as trend failure; too loose can give back a large part of open profit.
When you must exit, prioritize protective stop logic that can trigger. When you are waiting for a better price, then consider limit orders. Do not confuse “best price” with “lowest risk,” because not being filled is itself a risk.
9.3 Order Book, Spread, Slippage, and Partial Fill
The order book shows current buy and sell orders. The gap between best bid and best ask is the spread. Wider spread means higher cost.
Slippage is the difference between expected and actual fill price. It can come from:
- Fast market movement.
- Order size larger than available depth.
- Low liquidity.
- News or opening gaps.
- Using market orders to chase.
Partial fill means only part of the order is executed. It is more common with limit orders. For large positions or low liquidity instruments, partial fills affect real risk.
Execution cost must be included. A trade that looks like 2R on paper may have much worse real reward-to-risk after fees and slippage.
Execution-quality checks:
- Whether entry slippage often moves the actual entry away from plan.
- Whether exit slippage often makes actual loss exceed -1R.
- Whether real size and real risk are recalculated after partial fills.
- Whether reward-to-risk remains sufficient when spreads widen.
- Whether execution quality worsens around major news, open, or close.
If a strategy only works at ideal fill prices, it is not a complete strategy. It is only a chart assumption.
9.4 Liquidity and Execution Quality
Liquid markets usually have:
- Deep bid and ask.
- Narrow spread.
- Continuous execution.
- Large orders do not move price much.
Illiquid markets often have:
- Wide spread.
- Small orders move price.
- Stops slip.
- Orders disappear quickly.
- Chart patterns distort.
Technical patterns are usually more reliable in liquid markets because price reflects broader participation.
When liquidity clearly worsens, the direct response is not to force the trade. Reduce size, require better conditions, or abandon the plan. A chart can look excellent, but if execution cost and exit quality are poor, the trade has no value.
No-trade conditions in low liquidity:
- Spread already consumes a large part of planned profit.
- After a stop triggers, there may not be enough opposite-side liquidity.
- Long wicks appear often, but volume and order-book depth are weak.
- The plan requires market orders, but depth cannot absorb the order.
- The chart signal looks good, but real execution is poor.
Technical analysis must yield to execution quality. If you cannot fill, fills are too expensive, or exiting is difficult, a beautiful pattern may have no trade value.
9.5 Gap Risk in Planning
Gaps can make stops imprecise. If you plan to stop at 98 but the market opens at 92 after news, real loss may exceed plan.
Gap risk is common in:
- Stocks and ETFs overnight.
- Earnings, regulatory announcements, macro data.
- Futures after trading breaks.
- Low-liquidity instruments.
- Leveraged forced liquidation.
Responses:
- Reduce or avoid positions before major events.
- Avoid placing stops exactly at obvious liquidity areas.
- Use more conservative overnight risk.
- Keep margin buffer for leveraged positions.
- Record planned stop versus actual fill in review.
If the main risk of a trade is a gap and the account cannot tolerate the loss after stop failure, the position should not be held through the event. A stop is a risk-control tool, not insurance for a guaranteed fill price.
Therefore the plan should state in advance: which events mean no position, which positions must be cut in half, and which instruments should be avoided during gap windows. A trade plan without event risk written into it is only betting that nothing will happen.
9.6 Practice
Observe the order book and executions of one instrument for a day:
- Record normal spread.
- Record whether spread widens during volatility.
- Use small limit orders to observe fill ease.
- Compare market and limit order fill quality.
- Check whether your strategy depends on perfect fills.
If a strategy only works with perfect fills, it may not be robust.