Many investors engage in momentum trading. To these investors, “trading the gap” (also called “gapping up stocks”) isn't logical. After all, what goes up must come down — and usually hard. They reason that if a stock gaps up, it’s due for a correction.
This thinking can be true for stocks with weak fundamentals, or when the market is trending down. In those cases, gap-up stocks rarely stay at those levels, no matter how strong the lift. However, that thinking can work against investors.
For example, in a bullish market, a stock with strong fundamentals may gap after a strong earnings report. When institutional investors learn about the bullish report, they may increase the price. As a trader, if you stay away from the stock, believing that momentum is working against you, you may miss out on significant gains.