How To Trade Gaps In Stocks – Gaps are common, especially in the stock market, and they can provide information and insight into underlying market dynamics. A gap usually occurs when the previous day’s closing price and the next day’s opening price are different (see screenshot below). During periods of greater volatility, there may also be intra-day gaps.
The chart below shows the price chart of APPL showing a strong resistance level. After the gap formed, the trend accelerated.
How To Trade Gaps In Stocks
Studying the chart below shows numerous breakaway distances through key resistance levels. Each breakaway distance also leads to a continuous trend.
Gap Up And Fade
A falling gap usually occurs during a trend period and can signal a reversal. The price makes a last gap in the direction of the trend and then reverses.
The following chart position shows two exhaustion gaps between previous support (2) and resistance (1) levels. In both cases, the candles after the gap represent short doji candles and thus indicate indecision. The next candles are large momentum candles and provide final signals.
It is recommended to wait for the completion of the candle that confirms the change of direction in order not to run into a false signal.
There are constant gaps in the center of the trend. In an uptrend, a gap to the top indicates a continuation and indicates that additional buyers are entering the market to push the price higher.
The Gap Fade And Fill
Preferably, the continuous holes are not too large in size to confirm durability. Any extreme price or gap movement can indicate a change in buyer and seller dynamics.
As the name implies, a normal gap is not common and can often occur without major consequences for subsequent price movements.
Gaps in communities often occur when prices rise. These types of pores are not large in size and fill up relatively quickly. The screenshot below shows the price chart for QQQ. The price is variable and normal holes often occur in the range without signal effect.
Thus, it is recommended to avoid trade gaps within a limit and without additional combination factors. The other 3 types of holes usually provide high probability trading opportunities.
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After a gap is formed, it often happens that the price eventually returns to the origin of the gap and thus “closes” the gap.
Important in this context is that hole closure does not always occur. Moreover, the gap does not necessarily close.
I don’t recommend trading gap closes on your own, but using gapfill as a way to pick a target can be beneficial. Also, once the gap is closed, you may find opportunities to re-enter, as the price returns to the original direction.
In forex, gaps occur less often, but there is a similar mechanism that we can observe. Extremely long candles often tend to get “full” again. Price usually has an easy time reaching the origin of such long candlesticks. Below you can see how the long candle on AUDCAD was filled with another strong rejection. There is no support/resistance for the price when passing through such a candlestick. Please read our previous article, where we discussed VWAP trading strategy in detail. At the end of this article, you will understand the following pointers in detail.
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The difference between the closing price and the opening price of two consecutive candles is called the gap. A gap occurs when prices skip between two trading periods, skipping more than some prices. A hole creates a void on the price chart. Price gaps are simply areas on the chart where no trade has taken place.
An up-gap acts as a support zone and a down-gap acts as a resistance zone. The chart below for RELIANCE stock shows the range that acts as a price support.
Gap-fill refers to the price return and closes the level where the gap originates. If the previous day’s price trend is also upward, the closing level (gap-fill) increases for an upward gap. If the previous day’s open-to-close movement is downward, the closing level (gap-fill) increases for the downward direction.
The gap price then tries to fill the gap. Another occurrence with a gap is that once the price fills the gap, the gap moves in the opposite direction and continues its path towards the gap (eg RELIANCE’s bottom, top).
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A breakaway gap is the breaking of an important support or resistance or an important trend line in the form of a gap. It usually appears after the completion of a significant pattern such as price in a consolidation range as a continuation or reversal pattern. Maximum Time This distance is not very fast or on the same day. The main volume should be higher
Smart money knows exactly where these resistance areas are. If the smart money is bullish and higher prices are expected, the smart money will definitely want a rally. The question now is how to avoid the old opposition
We now have a clear sign of strength. Smart money doesn’t want to buy stocks at high prices. They have already bought their main hold at lower levels.
Here you can see that prices are quickly driven up by the smart money, whose market opinion at the time was bullish. We know this because the volume has increased. This cannot be a trap-up movement because the high volume supports the movement
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The chart study above shows the breakaway distance through key support and resistance levels. Any breakaway gap also leads to a continuous trend.
After the movement continues for some time, the price will diverge somewhere in the middle, this interval is called the run-out interval. In an uptrend this is a sign of trend continuation; In a downtrend, a sign of trend continuation.
You will find that weak gap ups are always gap ups to resistance or gap downs to support. This price action is usually designed to trap you in potentially weak markets and bad trades, stop losses on the short side, and generally scare traders into doing the wrong thing.
Near the end of the uptrend, an exhausting gap occurred. However, that upside gap is fast disappearing and prices are falling. When prices close below that last hole (exhaustion hole), an exhaustion hole is usually formed. A fatigue gap occurs with extremely high noise.
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These holes appear at the beginning of movements. Generally occur in supply or demand zones. (Distance from demand area and distance from supply area below) When the price quality reaches the supply and demand area
However, low volume warns you of a trap-up move (indicating lack of demand in the market) after gap-up resistance.
There are three factors to check if a hole is real or stable. The three factors are volume, opening price and withdrawal
If the stock rises and then sells off and remains below its opening price after this morning’s pullback stabilizes, it is possible that the stock has reached the high of the day. However, if a stock declines and pulls back in the morning retreat, but then rallies above its opening price, the mark-up hole may not have been caught and the stock will make new intraday highs.
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If the market breaks, the hole acts as a base level for any pullback. Pullback tests of low-noise holes suggest that the problem is not getting enough energy out of the hole; Instead, the gap is supported and any bullish signal is triggered by our buy entry
Let’s analyze the downtrend and the previous day was a down day. Today’s price gap is widened, but closed within the previous day’s range. We will have access
In the context of a downtrend, when a bearish reversal signal is given, price divergence is a very small opportunity. A price rise in the context of a downtrend is a buying opportunity with low odds
Note:- This entry technique is very risky as we are going against the trend and momentum so double confirmation is required
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In the next article I will discuss in detail about Intraday Open High Open Low Trading Strategy. Here, in this article, I try to explain in detail how to trade with GAP trading strategies and I hope you will like this article on GAP trading strategy. Please join my Telegram channel and YouTube channel as well as my Facebook group to know more and clear your doubts. The gap and go strategy is a popular strategy, especially among small-cap traders. As the name suggests, the goal is to identify a gap and then track or shorten it.
A gap refers to a situation where the price of a financial asset moves sharply higher or lower. This strategy can be used in stocks, currencies, exchange-traded funds (ETFs) and commodities.
You can use it for both day trading, scalping, swing trading and long term positions
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