Gap trading strategy is used mainly by traders but may also apply to the buy low, sell high investors. It’s basically where you take advantage of a snap back in price to either buy or sell. In most western markets, the time from taken to go either a week/month/year high or low and back to prior level can be a matter of hours and will usually be the first or last trades of the day. This then means that if you are trader you’ll want to put in a sell/buy order at these times. The gap trading will in effect be that you try to buy at the lowest (when it’s falling) and sell once it snap back to previous level. Or once you sense a price may rise, you sell at the highest level and look to buy when it snaps back to prior level. Gap trading strategy is event driven as stock prices react to macro/micro news. As such, the secret is clearly to keep an eye out for events that may impact the price. The worry is that sometimes, you get the opposite of the reaction you expect. A good example is a recent cash call (rights issue) by Lloyds TSB which led to the price going up for several days! Before starting the gradual fall to the rights issue price. So one then has to be agile.
At the NSE, such snap backs take weeks and months to effect. There are exceptions though. During the 3-4 year bull run, liquidity was such that a merger, bonus issue, good results would lead to 20% rise in short-term share price. During the bear period, the snap backs have taken longer. However they are still event-driven and it’s thus possible to benefit from movement.