How to Trade Gaps ? [ Invitation for ]

Published: Sun, 01/24/16

Technical Analysis : How to Trade Gaps

Gap is a very common market variable  used by technical analyst . A Gap is a very important chart pattern without which the study of charts for technical analysis is incomplete . Gaps shows that no trade took place  at that certain time . Gaps occur when prices jump in response to sudden imbalance of buy or sell orders . When the open of day 2 is greater than the close of day 1 , it is referred to as Gap Up , similarly when the open of day 2 is lower than the close of day 1 , it is called as Gap Down .

Gaps as Support and Resistance

Gaps can serve as support and resistance levels . If greater volume occurred after an upside gap , it indicates very strong support . If greater volume occurred before the gap , then support is less strong . The reverse is true for resistance levels .

The below chart shows how the gap up level acts as support .

gap up as support

Another chart  of ABNuvo shows how the break down level acts as resistance , the price fails to move up the gap down level

gap down as resistence

How To Trade Gaps 

Gaps can occur in the daily chart as well as in the long term charts . Gaps in the long term charts are only considered as valid , each valid gap should have increase in the volume . Gaps are not generally used for day trading . Below are most common rules of gaps trading strategy .

1. Trade when the market breaks out of a long trading range with the increase of volume ,  If prices have gapped to the upside , buy and place a stop below the lower rim of the gap . If the price have gapped to the down side , sell and place a stop above the upper rim of the gap

2. A valid gap must be confirmed by a series of several new highs or lows. If the prices refuses to reach new highs or lows in the direction of gap , exit your trade .

Technical indicators can help to calculate the price target after the gap has occurred. You can use any charting software  for this .

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