In traditional technical analysis, gap is used as a quite reliable and popular pattern used to enter the market or exit an already open position. Many traders apply gaps in their trading, because this pattern often presents a good opportunity to make money with a fixed Stop Loss, a predictable Take Profit level and a good probability of the pattern materialization.
As noted above, price break on the charts is explained by a strong shift in investor sentiment regarding the actual value of currency pairs. Accordingly, the level at which a gap originated and the price level where trading continued are considered to be important price levels that can further act as support and resistance. Traders noticed the following regularity: when a gap is being formed, the price often tends to fill this price break. The given statistics applies particularly to weekly gaps, since intraday gaps occur much less frequently and are formed as a result of high-impact news releases.
Filling such gaps can happen for several days or even weeks, because the news can be so important that investors will not soon be able to believe that the price can actually return to the previous levels. Gap trading strategy is based on the above-described regularity of filling weekly gaps in the first hours after the market opens. This strategy is one of the most popular and stable. In other words, to trade contrary to retail traders.
If a currency pair gaps up at the Monday open, a trade should be opened in the downward direction Sell ; if a currency pair gaps down at the Friday close, a trade should be opened in the upward direction Buy. You should enter a trade 30 minutes after the market opens, because, statistically, the market still moves towards a gap direction for the first 30 minutes.
When the first candlestick closes on M30 timeframe, enter a position towards a gap filling. Before filling a gap, the price may still go against your position for a while, so you need to determine an acceptable level of Stop Loss to stay in the market. To do this, you need to multiply the size of Take Profit the target of a trade by 1. Related Articles. What's Next? Sign Up Enter your email. Did you like what you read? Let us know what you think! Please make sure your comments are appropriate and that they do not promote services or products, political parties, campaign material or ballot propositions.
Full gapping stocks generally trend farther in one direction than stocks which only partially gap. However, a smaller demand may just require the trading floor to only move price above or below the previous close in order to trigger buying or selling to fill on-hand orders. There is a generally a greater opportunity for gain over several days in full gapping stocks. If there is not enough interest in selling or buying a stock after the initial orders are filled, the stock will return to its trading range quickly.
If a stock's opening price is greater than yesterday's close, but not greater than yesterday's high, the condition is considered a Partial Gap Up. The process for a long entry is the same as for Full Gaps, in that one revisits the 1-minute chart after AM and sets a long buy stop two ticks above the high achieved in the first hour of trading.
The short trade process for a partial gap up is the same as for Full Gaps, in that one revisits the 1-minute chart after AM and sets a short stop two ticks below the low achieved in the first hour of trading. If a stock's opening price is less than yesterday's close, revisit the 1-minute chart after AM and set a buy stop two ticks above the high achieved in the first hour of trading.
The short trade process for a partial gap down is the same as for Full Gap Down, in that one revisits the 1-minute chart after AM and sets a short stop two ticks below the low achieved in the first hour of trading. If a stock's opening price is less than yesterday's close, set a short stop equal to two ticks less than the low achieved in the first hour of trading today. If the volume requirement is not met, the safest way to play a partial gap is to wait until the price breaks the previous high on a long trade or low on a short trade.
All eight of the Gap Trading Strategies can also be applied to end-of-day trading. Using StockCharts. Increases in volume for stocks gapping up or down is a strong indication of continued movement in the same direction of the gap. A gapping stock that crosses above resistance levels provides reliable entry signals. Similarly, a short position would be signaled by a stock whose gap down fails support levels. The only difference is that, instead of waiting until the price breaks above the high or below the low for a short , you enter the trade in the middle of the rebound.
The other requirement for this method is that the stock should be trading on at least twice the average volume for the last five days. This method is only recommended for those individuals who are proficient with the eight strategies above and have fast trade execution systems. Since heavy volume trading can experience quick reversals, mental stops are usually used instead of hard stops.
If a stock's opening price is greater than yesterday's high, revisit the 1-minute chart after AM and set a long stop equal to the average of the open price and the high price achieved in the first hour of trading. This method recommends that the projected daily volume be double the 5-day average. If a stock's opening price is less than yesterday's low, revisit the 1-minute chart after AM and set a long stop equal to the average of the open and low price achieved in the first hour of trading.
Members of StockCharts' Extra service can run scans against daily data that is updated on an intraday basis. This is perfect for finding gapping stocks. Simply run the pre-defined gap scans using the Intraday data setting around AM Eastern. This is an excellent source of ideas for longer term investors. Although these are useful lists of gapping stocks, it is important to look at the longer term charts of the stock to know where the support and resistance may be, and play only those with an average volume above , shares a day until the gap trading technique is mastered.
The most profitable gap plays are normally made on stocks you've followed in the past and are familiar with. In simple terms, the Gap Trading Strategies are a rigorously defined trading system that uses specific criteria to enter and exit.
Trailing stops are defined to limit loss and protect profits. The simplest method for determining your own ability to successfully trade gaps is to paper trade. Paper trading does not involve any real transaction.
Instead, write down or log your entry signal, then do the same for your exit signal. After this, subtract your commissions and slippage to determine your potential profit or loss. Gap trading is much simpler than the length of this tutorial may suggest.
It's not recommended to use this strategy on the real account without testing it on demo first. Do you have any suggestions or questions regarding this strategy? What Is Forex? Please disable AdBlock or whitelist EarnForex. Thank you! Features Regular trading with clear rules. No stop-loss hunting or premature hits. Statistically proven profit. You have to open position at the week's beginning and close it right before the end.
How to Trade? Select a currency pair with a relatively high level of volatility.