Trading on gaps

All beginner looking at the chart may notice that sometimes there is a significant gap between the closing price of a candle and the opening price of the next candle. That’s the gap.

In the stock market it is observed quite often. However, you can also see such price gaps in the charts of currency pairs.

Gap trading is practiced by many traders. It’s got the right strategies under it. But for successful trading on a price break you need to know about some of its features.

The practice of trading in different markets has shown that there can be four types of price gaps. Let’s consider them in more detail.

Trouble

If a trend movement breaks the price while it overcomes strong support (for a downtrend) or resistance (for an uptrend), the market trend is likely to continue. You can decide to open an order in this direction.

Exhaustion

This type of gap can be observed after a long trend. It is a signal of a possible reversal of the price movement direction. The rate of a currency pair or other trading instrument makes the last breakthrough, indicating the exhaustion of the forces of “bulls” or “bears”. However, in this situation we should not rush to make trade decisions. Wait for confirmation of the spread.

Continuation

Gap continuation, as a rule, is formed in the middle of the trend. It is often caused by the arrival of new buyers or sellers. This type of price gap is not large in size. It can be considered as a signal to open orders in the direction of the existing trend.

Price Volatility

And finally, the last type of gap has no reason and consequences,
listed above. It is the result of price fluctuations, has a small
the size, is quickly filled in and does not have a serious impact on the market dynamics.
Such a price gap cannot be considered as a basis for adopting
trading solutions.

Gap trading is conducted by different strategies. But the most popular of them is making money to close the price gap. That is, when a gap appears, an order opens in the opposite direction with the expectation that the price will return to the closing level of the previous candlestick. That’s what happens in most cases. However, this outcome is not guaranteed. This should be kept in mind and be careful when opening transactions. As a rule, filling the price gap occurs quickly. Otherwise, it is necessary to close the order in order not to get a larger loss.

Fyodorov’s Inga

15.04.2019