Gaps in trading offer an intriguing opportunity for day traders. In this article, we’ll delve deep into the gap trading strategies and help you understand how they function.
What are the gaps?
Gaps arise when there’s a disparity between two consecutive candles’ closing and opening prices. These gaps highlight areas on a chart where no trading transpired.
Why the price gap?
Price gaps manifest mainly due to supply and demand imbalances. Gaps could arise from overnight sentiments, pivotal news events, or even from smart money intending to bypass key support and resistance levels.
5 Simple Day Trading Gap Strategies:
1. Gap and GO Trading Strategy
- Criteria for this strategy:
- Price should gap up above the previous day’s high.
- The initial candle should complete.
- High volume that supports the direction of the gap.
- Note the opening range.
- Entry is signaled on a breakout of the day’s high with the price above VWAP.
2. Gap-fill reversal Trading Strategy
- Wait for the price to gap up.
- Observe if the stock pulls back to its prior day’s close, filling the gap.
- Look for a sign of strength and enter the position.
- Ensure the price doesn’t close within the previous day’s range in any five-minute candle.
- Set a stop below the candlestick’s low.
3. Open Gap Reversal Trading Strategy
- An extended uptrend should be evident on the chart.
- A gap up in price to a quality supply zone indicates a high odds shorting chance.
- After a gap up, if the price starts descending and crosses the prior day’s close, it signals a sell.
- The stop-loss is positioned at the day’s low.
4 & 5. Inside GAP Trading Strategy
- In a downtrend with the previous day being bearish, the entry opportunities include:
- Gap up short
- Gap up long
In an uptrend, entry opportunities encompass:
- Gap down long
- Gap down short
To differentiate between a real gap up and one manipulated by smart money:
- Ensure heavy volume during a gap up.
- Confirm the market trades above its opening prices post the morning pullback.
Types of Gap Trading Strategy:
- Breakaway (or Breakout) Gaps: These highlight a break from significant support, resistance, or trendlines.
- Runaway (or Measuring) Gaps: These suggest trend continuations.
- Exhaustion Gaps: Typically found near the culmination of a trend, signaling potential trend reversals.
- Professional Gap: Occurs at the onset of movements, typically at supply or demand zones.
- Inside gap: Happens within the range of the prior trading session.
Determining the Validity of a Gap:
To discern if a gap is genuine or a trap, one should monitor:
- Volume: It’s pivotal to inspect volume meticulously. High volume following a gap up suggests further upward movements.
- Opening Price and Pullback: After a gap up, observe the pullback.
- Flat pullback signals a strong buy.
- A weak pullback that doesn’t close below the previous day’s high signals a buy.
- A strong pullback that closes beneath the previous day’s high signals a sell.
Understanding gaps and how to trade them is crucial for day traders. These strategies, if employed with discipline, technical analysis, and the right mindset, can potentially provide lucrative opportunities in the market. As always, it’s essential to do your research, backtest strategies, and ensure that you’re well-prepared before diving into the world of gap trading.