How to Trade the Gaps? : NobleTrading Blog

Wednesday, December 16, 2009

How to Trade the Gaps?

Gaps in price charts are considered good trading opportunities and indicators. Most gaps are triggered by news, rumors or market sentiments and moves prices in a certain direction. Gaps are often filled and are associated with different candlestick/chart patterns. For a better understanding, read different gap patterns.

The first and foremost thing in trading the gap is determining the type of gap pattern formed. Is that a continuation or a reversal pattern? It is always good to trade with the market rather than going against it.
Check whether the gap can fill in the near future. Common gaps and exhaustion gaps are often filled more quickly than breakaway gaps and runaway gaps.
The volume associated with the gap pattern is also important. A breakaway gap without high volume can be filled in the near future than those with high volume.
The reliability of the triggering factor of the gap is also important. Gaps created on rumors are more likely to be filled than those on fact/stats. Similarly gaps created because of over optimistic/pessimistic trader behaviors can be short lived.
Many common gaps can be filled within the trading day (called fading); this offers very good opportunities to day traders.
Gaps formed often act as supports/resistances for future movements. Thus crossing of price below/above these levels respectively can trigger strong reversals as there is no other immediate support/resistance available.
Gaps are much more reliable, when their direction is also confirmed by other indicators.
When fading against the trend, it is good to determine the high and low points and to use proper risk minimizing strategies.