Learn what the different swing trading order types are, how to use them, and when they are effective.

One major determinant of how I use order is price gaps. Certain order types allow me to navigate price gaps, control risk, take profits, and control my entry price. Other types may not do it as effectively.

Stock price gaps can be frustrating. The price can gap against us, causing a larger loss than expected. The price can also gap when we are trying to get into a trade, causing us to miss our entry point or get a far worse entry price than expected (depending on order type).

In this article, we will explore stock gaps, what they are, and how to navigate them using our strategies and our order types.

What is a Stock Price Gap?

A price gap occurs when there is no trading in a certain price area. Say a stock closes the day at $50. Overnight, the company releases its earnings, and investors like what they hear. The next morning, investors are willing to buy the stock for $60, and no one is willing to sell for less than that.

The stock trades at $60 the next day at the open. The distance between $50 and $60 is the gap. Unless you were willing to trade in the after-hours market or pre-market (and even then, there may be no one to transact with), you are unable to enter or exit positions within that gap unless the price moves back into the area it gapped through at a later date.

If you had a buy order at $51, it would not be filled.

If you were in a short position heading into earnings—expecting the earnings to be bad—and you had a stop loss order at $55, it would be filled at $60. You take a bigger loss than expected.

If you own the stock and are just holding it, you welcome the price increase. In this case, the gap is good. Or let’s say you were already long and had a sell order at $54. Because the price opens higher than that, your broker will fill your sell order at $60 because that is the first chance they have had to sell your shares above $54. A very welcome extra $6 profit per share.

Essentially, a gap is an area with no transactions. There is no opportunity to get in or out within the price gap.

Charts from TradingView. The charts I use.

For a step-by-step video guide on how to swing trade stocks, check out the Complete Method Stock Swing Trading Course

How Gaps Affect Various Stock Market Order Types

Because prices gap, what order type you use is very important. Since we can’t know when all gaps will occur, we should always consider what types of orders we are using in case there is a gap. Many gaps occur on earnings announcements. I don’t hold swing trades through earnings announcements, I exit before. But I will place trades after the earnings announcement has been released.

Buy Stop Limit Orders

I always buy stocks when the price is moving up, breaking above a resistance level, moving up off support, or breaking above the top of a pattern, consolidation, or candle. That means I use buy stop limit orders. These help control the price I pay if a gap occurs.

For example, assume I liked the contraction pattern in Electovaya (EFL, on the Canadian exchange). The price is consolidating within the contraction pattern, and the top of the consolidation is $1.64. Assume the breakout hasn’t happened yet, but I want to catch it if it does.

For my entry, I place a buy stop limit order at $1.65…that is the stop portion. That will trigger me into a trade if the price hits $1.65 or higher. If the stock gaps up, I could be paying any price…$1.68, $1.75, who knows. Is it still the same trade when I pay that much more than expected? It isn’t. Risk/reward can change dramatically even with slight changes in entry.

In this case, the stock didn’t gap higher, but I still put a LIMIT on my buy stop. I may be willing to pay an extra 1% (of the share price), so my limit goes at $1.66 for example. This controls my entry price and limits the price I pay to $1.65 or $1.66

So I need two prices for a buy stop limit order. The stop price of $1.65, and the limit price of $1.66, for example.

My order only gets filled if someone is willing to transact with me at $1.65 or $1.66. If the price opens the next day at $1.68, my order will sit there as a buy limit order at $1.66.

If the stock gaps above the limit portion of my buy stop limit order I will not get into the trade. This protects me from paying too much for a stock. I can always cancel the order and get in following a gap if I feel the conditions warrant paying a higher price.

Let’s look at another example. Vericel (VCEL) had a slightly ascending contraction pattern. Once it forms a 3+ day consolidation, a buy stop limit order is placed above the high of the consolidation.

The high of the consolidation was $27.65. The buy stop goes just above this at $27.66 (stop price).

To control how much I pay, I also add a limit. If the price moves a lot maybe I will pay up to a percent more. If it doesn’t move much, then half a percent extra or less. This stock has been moving fairly well but doesn’t do a lot of volume (another factor to consider). So I am willing to pay an extra 0.5% or about 14 cents. Therefore, my limit goes at $27.82. That means I will get shares if someone transacts with me between $27.66 and $27.82. If the price gaps above $27.82, then my order just becomes a limit order sitting at $27.82 waiting to get filled.

Buy Limit Order

Occasionally I will miss an entry, or the price gaps through the entry and I want to see if I can get in at the original entry point, even though the stock price is already above it.

In this case, I put a buy limit at the price I want to get in at. For example, if the consolidation breakout price is $25.25, but for whatever reason I didn’t see the trade or forgot to put an order, and the price is now trading at $25.50, I can still place an order to buy near $25.25 (limit buy order). If the price has a little pullback it may fill my order at the original entry price. A buy limit order fills at the specified price or below.

Stop Loss (Sell Stop Order)

For a stop loss order on a long trade, I use a sell stop. Most brokers just call this a stop loss.

A sell stop sells at any price it can get at or below a specified price. If the price is dropping, I want out regardless of cost. I typically do not hold my swing trades through major events like earnings, so I’m unlikely to be in a stock when big downward gaps occur (discussed more below).

For example, on the VCEL chart above, the low of the consolidation is $25.75, therefore my stop loss goes just below that. If the price drops below $24.74 I want out. In this case, I don’t control what price I get. If the stock drops below $24.74 my stop loss is triggered as a market order and will take whatever price is available. Usually, this is about $24.74, but if the stock gaps down to $24.50 that means I’m getting out at $24.50.

It sucks taking a bigger hit than expected, but what sucks more is not getting out and the stock keeps dropping to $25, $24, $20, and so on.

Profit Target (Sell Limit Order)

As for taking profits, I use a sell limit order. This gets me out at any price above my specified price.

On the EFL example above, my target was $2.47. I place a sell limit at $2.47 to exit my trade. In this case, the price moved up and filled my order at that level during the day. So I got out at $2.47.

If the price had not reached my profit target and then gapped to $2.55 the next open, that is the price I would have gotten out at, because it is the first price to sell at, at or above, my $2.47 specified price.

A Simple Guide to Basic Stock Market Order Types

A buy stop order will fill at the stop price or any price above it.

A buy stop limit order will fill at the stop price or higher, but only up to the limit price. This is what I typically use to enter long trades in stocks.

A sell stop will fill at the stop price or lower. This is typically called a “stop loss” order for a long trade.

A sell stop limit order fills at the stop price or below, but only down to the limit price. If I wanted to short a stock (enter), this is typically what I would use.

A buy limit order will fill at the limit price or below. This is typically used if you want to buy as the price is dropping.

A sell limit order will fill at the limit price or above. This is commonly used to exit a long trade at a profit.

Bracket Orders, and OCO Orders

Many brokers offer the option to place a bracket or One Cancels Other (OCO) order. I highly recommend this.

These orders allow you to attach a stop loss and target to your entry order. That way, when your entry is filled (you get the position), a stop loss and profit target order will also be placed on that trade. Before placing the trade, you select the price levels you want for all the orders.

I find this provides peace of mind because whether the price goes up or down I have an order that will get me out of the trade at my desired loss or profit.

When either the stop loss or target is filled, the other remaining order is canceled.

Additional Measures For Navigating Gaps

Earnings announcements and corporate events are the biggest causes of stock price gaps. The dates of these events are disclosed in advance. If you hold a stock on that day, you will likely have to experience a gap, potentially a large one.

While a gap can be favorable, I typically choose to not hold my trades through earnings. There are lots of opportunities to profit from the price swings between earnings. To me, holding through earnings is a gamble unless you have a strategy specifically designed for trading them.

Other corporate events are the same, such as votes or conference calls. If something could be revealed that startles investors or could change the trajectory of the company, I see no reason to be in that trade as a swing trader. That uncertainty can cause gaps, and I don’t want to be on the wrong side of a big one.

So if you want to avoid gaps, avoid holding trades through earnings and corporate events (dividends are fine to hold through). Wait until after the earnings or event to place your orders. Let the gap occur, then decide if and where you want to trade.

In addition, always manage your position size. I never put all my money in one stock, because if it gaps down by 50% (it can and has happened) I don’t want to lose half my capital on one trade. For more on how to position size effectively, see How Much Stock to Buy.

Gaps in our favor are a delight. We like those. Everyday gaps—gaps that occur outside of news events—tend to occur more often in the trending direction. Therefore, I don’t want to fight the trend. I like holding stocks while they are rising because they also tend to gap in that direction as well. Once a stock starts selling off hard, it is more likely to gap lower and further against us. Here’s the first chart again, to highlight this point.

Summary Points for Navigating Stock Price Gaps

I use a buy stop limit order for entering long positions. This means I’m buying as the stock is moving up, but I also control how much I pay in case the price gaps up.

I use sell stop market orders as my stop loss or if I want to exit a long trade right now.

I use a sell limit order to exit my long positions at a profit target.

I don’t typically hold my trades through earnings or corporate events.

I control my position size. If I do happen to get caught in a bad gap against me, it won’t ruin me.

I also trade with the trend. This means I am more likely to experience favorable gaps in my trade direction and mostly avoid the gaps that go against me.

Gaps can’t be avoided entirely, and sometimes we do end up losing more than expected. That is part of trading. The flip side is that sometimes the gaps help us and make us more money than expected. But we always need to consider our risk first and foremost. If we don’t, we won’t be around long enough to catch any of those favorable moves.

For a step-by-step video guide on how to swing trading stocks, check out the Complete Method Stock Swing Trading Course

Cory Mitchell, CMT

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.