Gap Trading Strategies

Gap Trading Strategies Gap trading is a simple and disciplined approach to buying and shorting stocks. Essentially one finds stocks that have a price gap from the previous close and watches the first hour of trading to identify the trading range. Rising above that range signals a buy, and falling below it signals a short. What is a Gap? A gap is a change in price levels between the close and open of two consecutive days. Although most technical analysis manuals define the four types of gap patterns as Common, Breakaway, Continuation and Exhaustion, those labels are applied after the chart pattern is established. That is, the difference between any one type of gap from another is only distinguishable after the stock continues up or down in some fashion. Although those classifications are useful for a longer-term understanding of how a particular stock or sector reacts, they offer little guidance for trading. For trading purposes, we define four basic types of gaps as follows: A Full Gap Up occurs when the opening price is greater than yesterday's high price. In the chart below for Cisco (CSCO) , the open price for June 2, indicated by the small tick mark to the left of the second bar in June (green arrow), is higher than the previous day's close, shown by the right-side tick mark on the June 1 bar.

A Full Gap Down occurs when the opening price is less than yesterday's low. The chart for Amazon (AMZN) below shows both a full gap up on August 18 (green arrow) and a full gap down the next day (red arrow).

A Partial Gap Up occurs when today's opening price is higher than yesterday's close, but not higher than yesterday's high.

The next chart for Earthlink (ELNK) depicts the partial gap up on June 1 (red arrow), and the full gap up on June 2 (green arrow).

A Partial Gap Down occurs when the opening price is below yesterday's close, but not below yesterday's low.

The red arrow on the chart for Offshore Logistics (OLG) , below, shows where the stock opened below the previous close, but not below the previous low.

Why Use Trading Rules? In order to successfully trade gapping stocks, one should use a disciplined set of entry and exit rules to signal trades and minimize risk. Additionally, gap trading strategies can be applied to weekly, end-of-day, or intraday gaps. It is important for longer-term investors to understand the mechanics of gaps, as the 'short' signals can be used as the exit signal to sell holdings.

How to Trade Gaps on a Stock Chart

Are all gaps created equal? Nope. There are really only two significant factors to consider when trading gaps. You have to be able to identify if the gap is caused by professional traders or amateur traders. Let's start at the beginning... What is a Gap? A gap is defined as a price level on a chart where no trading occurred. These can occur in all time frames but, for swing trading, we are mostly concerned with the daily chart. A gap on a daily chart happens when the stock closes at one price but opens the following day at a different price. Why would this happen? This happens because buy or sell orders are placed before the open that cause the price to open higher or lower than the previous day's close. Here is an example: Let's say that on Tuesday, Microsoft closes at $26.57. After the close they come out with their earnings report. They report higher than expect earnings that causes excitement among investors. Buy orders come flooding in. The next day Microsoft opens at $27.60. Since there were no trades between $26.57 and $27.60 this will create a gap on the chart.

Let's look at a chart:

You can see on the chart above that the stock closed at one price and then the next day the stock "gapped up" creating a price void on the chart (yellow circle). Filling The Gap Sometimes you will hear traders say that a stock is "filling a gap" or they might say that a stock has "a gap to fill". Are you wondering what the heck they are talking about? In Japanese Candlestick Charting gaps are referred to as windows. When we say that a stock is "filling a gap", the Japanese would say that the stock is "closing the window". They are talking about a stock that has traded at the price level of a previous gap. Here is a chart example:

In this example, you can see that the stock gapped down. A few days later it rallied back up and filled in the price level at which there were previously no trades. This is known as filling the gap.

Sometimes you will hear traders saying that "gaps always get filled". This just simply isn't true. Some gaps never get filled, and sometimes it can take years to fill a gap. So I really don't even think it is worth debating because it offer no edge one way or another! Types Of Gaps Traders have labeled gaps depending on where it shows up on a chart. It isn't really necessary to memorize all of these patterns but here is the breakdown so that you can impress your trading friends. Breakaway Gaps - This type usually occurs after a consolidation or some other price pattern. A stock will be trading sideways and then all of sudden it will "gap away" from the price pattern. Continuation Gaps - Sometimes called runaway gaps or measuring gaps, these occur during a strong advance in price. Exhaustion Gaps - This type of gap occurs in the direction of the prevailing trend and represents the final surge of buying or selling interest before a major trend change.

Ok, now we are going to get into the really good stuff... Professional Vs. Amateur Gaps When you are looking at gaps on a stock chart, the most important thing that you want to know is this: Was this gap caused by the amateur traders buying or selling based on emotion? Or... Was this gap caused by the professional traders that do not make emotional decisions? To figure this out you have to understand this one important concept first. Professional traders buy after a wave of selling has occurred. They sell after a wave of buying has occurred. Amateur traders do the exact opposite! They see a stock advancing in price and are afraid that they will miss out on the move, so they pile in - just when the pro's are getting ready to sell. Here is an example of a gap caused by amateur traders...

See how this stock gapped up after a wave of buying occurred? These amateur traders got emotionally involved in the stock. They piled in after an already extended move to the upside. These traders eventually lost money as the stock sold off over the next few weeks. Notice how the stock eventually did go back up - but only after a wave of selling occurred (professional buying).

Here is another chart:

See how this stock gapped down after a wave of selling occurred? These amateur traders got emotionally involved in the stock. They sold after an already extended move to the downside. Ok, so let's break this down, shall we? If a stock gaps up after a wave of buying has already occurred, these are amateurs buying the stock - look to short. If a stock gaps down after a wave of selling has already occurred, these are amateurs selling the stock - look to go long.

These types of gap plays usually provide great opportunities because they represent and extreme price move. Well, there you have it...a short primer on trading gaps. Gaps can provide nice swing trading profits but they can be a little more tricky to trade. The advantage is that you can sometimes make big profits, quickly, and with a little less risk... ...something every trader should strive for.

Gaps
Gaps occur when the lowest price traded is above the high of the previous day or, conversely, when the highest price traded is below the previous day's low.

A gap is filled when the range of subsequent bars closes the gap.

There are two basic rules: 1. Avoid trading common gaps, and 2. Only trade gaps when they are confirmed by volume. Equivolume charts highlight the interaction of price and volume.

Common Gaps

Common gaps occur in markets without a strong trend. They are not followed by new highs or new lows and are quickly closed in subsequent days' trading. Some gaps are caused by events and should be ignored: Ex-dividend gaps occur as price adjusts on the day after a dividend becomes payable; New share issues; and Expiry of futures contracts.

Breakaway Gaps

Breakaway gaps are normally accompanied by heavy volume and occur when prices break out of a trading range. They are usually followed by a series of new highs in an upside breakout or, a series of new lows in a downside breakout, and are seldom closed. Trading Rules Upside Breakaway If the gap is accompanied by heavy volume, go long and place a stop-loss at the lower end of the gap. Downside Breakaway If the gap is accompanied by heavy volume, go short and place a stop-loss at the upper end of the gap.

Continuation Gaps

Continuation gaps occur near the middle of strong trends and are useful in projecting how far the trend will continue. They are followed by new highs in an uptrend or new lows in a down-trend, which distinguishes them from exhaustion gaps. They are not normally closed. Trading Rules If volume is strong (up at least 50%), trade as for breakaway gaps. Enter the trade early and wait for new highs (or new lows in a down-trend) to confirm the pattern. If there are none in the next few days then exit immediately it could be an exhaustion gap.

Exhaustion Gaps

Exhaustion gaps occur at the end of a strong trend and are the last surge before the trend expires, normally on heavy volume. They differ from continuation gaps in that they are not followed by new highs (in an up-trend) or new lows (in a down-trend) and are closed shortly afterwards. Trading Rules Upward Exhaustion Gap Sell short (or close your long position) and protect yourself with a stop above the last high. Downward Exhaustion Gap Go long (or close your short position) with a stop below the latest low point.

Island Clusters

Look out for island clusters, identified by an exhaustion gap followed (after a few days) by a breakaway gap in the opposite direction, they are powerful reversal signals. Trading Rules Trade in the same way as exhaustion gaps.

GAP ANALYSIS TRADING STRATEGIES

While trading your favorite market, you spot a classic price formation: a Price Gap. Now what do you do? EWI's Senior Commodities Analyst Jeffrey Kennedy has market-tested techniques to show you how to anticipate and move on the opportunities presented by this easily identifiable market pattern. What Are Trading Gaps and Why Do They Happen? Have you ever wondered what causes gaps in price charts and what they mean? Well, you've come to the right place. Just in case, a gap is an area on a price chart in which there were no trades. Normally this occurs between the close of the market on one day and the next day's open. Lot's of things can cause this, such as an earnings report coming out after the stock market has closed for the day. If the earnings were significantly higher than expected, many investors might place buy orders for the next day. This could result in the price opening higher than the previous day's close. If the trading that day continues to trade above that point, a gap will exist in the price chart. Gaps can offer evidence that something important has happened to the fundamentals or the psychology of the crowd that accompanies this market movement. Before we get into the different types of gaps, here is a chart showing a gap so you will know what we are talking about.

Gaps appear more frequently on daily charts, where every day is an opportunity to create an opening gap. Gaps on weekly or monthly charts are fairly rare: the gap would have to occur between Friday's close and Monday's open for weekly charts and between the last day of the month's close and the first day of the next month's for the monthly charts. Gaps can be subdivided into four basic categories: Common, Breakaway, Runaway, and Exhaustion. Common Gaps Sometimes referred to as a trading gap or an area gap, the common gap is usually uneventful. In fact, they can be caused by a stock going ex-dividend when the trading volume is low. These gaps are common (get it?) and usually get filled fairly quickly. "Getting filled" means that the price action at a later time (few days to a few weeks) usually retraces at the least to the last day before the gap. This is also known as closing the gap. Here is a chart of two common gaps that have been filled. Notice that after the gap the prices have come down to at least the beginning of the gap? That is called closing or filling the gap.

A common gap usually appears in a trading range or congestion area, and reinforces the apparent lack of interest in the stock at that time. Many times this is further exacerbated by low trading volume. Being aware of these types of gaps is good, but doubtful that they will produce a trading opportunities. Breakaway Gaps Breakaway gaps are the exciting ones. They occur when the price action is breaking out of their trading range or congestion area. To understand gaps, one has to understand the nature of congestion areas in the market. A congestion area is just a price range in which the market has traded for some period of time, usually a few weeks or so. The area near the top of the congestion area is usually resistance when approached from below. Likewise, the area near the bottom of the congestion area is support when approached from above. To break out of these areas requires market enthusiasm and, either, many more buyers than sellers for upside breakouts or more sellers than buyers for downside breakouts. Volume will (should) pick up significantly, for not only the increased enthusiasm, but many are holding positions on the wrong side of the breakout and need to cover or sell them. It is better if the volume does not happen until the gap occurs. This means that the new change in market direction has a chance of continuing. The point of breakout now becomes the new support (if an upside breakout) or resistance (if a downside breakout).

Don't fall into the trap of thinking this type of gap, if associated with good volume, will be filled soon. It might take a long time. Go with the fact that a new trend in the direction of the stock has taken place, and trade accordingly. Notice in the chart below how prices spent over 2 months without going lower than about 41. When they did, it was with increased volume and a downward breakaway gap.

A good confirmation for trading gaps is if they are associated with classic chart patterns. For example, if an ascending triangle suddenly has a breakout gap to the upside, this can be a much better trade than a breakaway gap without a good chart pattern associated with it. The chart below shows the normally bullish ascending triangle (flat top and rising, lower trend line) with a breakaway gap to the upside, as you would expect with an ascending triangle.

Runaway Gaps Runaway gaps are also called measuring gaps, and are best described as gaps that are caused by increased interest in the stock. For runaway gaps to the upside, it usually represents traders who did not get in during the initial move of the up trend and while waiting for a retracement in price, decided it was not going to happen. Increased buying interest happens all of a sudden, and the price gaps above the previous day's close. This type of runaway gap represents an almost panic state in traders. Also, a good uptrend can have runaway gaps caused by significant news events that cause new interest in the stock. In the chart below, note the significant increase in volume during and after the runaway gap.

Runaway gaps can also happen in downtrends. This usually represents increased liquidation of that stock by traders and buyers who are standing on the sidelines. These can become very serious as those who are holding onto the stock will eventually panic and sell - but sell to whom? The price has to continue to drop and gap down to find buyers. Not a good situation. The term measuring gap is also used for runaway gaps. This is an interpretation that is hard to find examples for, but it is a way of helping one decide how much longer a trend will last. The theory is that the measuring gap will occur in the middle, or half way, through the move. Sometimes, the futures market will have runaway gaps that are caused by trading limits imposed by the exchanges. Getting caught on the wrong side of the trend when you have these limit moves in futures can be horrifying. The good news is that you can also be on the right side of them. These are not common occurrences in the futures market despite all the wrong information being touted by those who do not understand it, and are only repeating something they read from an uninformed reporter.

Exhaustion Gaps Exhaustion gaps are those that happen near the end of a good up- or downtrend. They are many times the first signal of the end of that move. They are identified by high volume and large price difference between the previous day's close and the new opening price. They can easily be mistaken for runaway gaps if one does not notice the exceptionally high volume. It is almost a state of panic if the gap appears during a long down move and pessimism has set in. Selling all positions to liquidate holdings in the market is not uncommon. Exhaustion gaps are quickly filled as prices reverse their trend. Likewise, if they happen during a bull move, some bullish euphoria overcomes trades, and buyers cannot get enough of that stock. The prices gap up with huge volume; then, there is great profit taking and the demand for the stock totally dries up. Prices drop, and a significant change in trend occurs. Exhaustion gaps are probably the easiest to trade and profit from. In the chart, notice that there was one more day of trading to the upside before the stock plunged. The high volume was the giveaway that this was going to be, either, an exhaustion gap or a runaway gap. Because of the size of the gap and the near doubling of volume, an exhaustion gap was in the making here.

Conclusion There is an old saying that the market abhors a vacuum and all gaps will be filled. While this may have some merit for common and exhaustion gaps, holding positions waiting for breakout or runaway gaps to be filled can be devastating to your portfolio. Likewise, waiting to get on-board a trend by waiting for prices to fill a gap can cause you to miss the big move. Gaps are a significant technical development in price action and chart analysis, and should not be ignored. Japanese Candlestick Analysis is filled with patterns that rely on gaps to fulfill their objectives.

Gap (chart pattern)

From Wikipedia, the free encyclopedia

Sequence of Gaps A gap is defined as an unfilled space or interval. On a technical analysis chart, a gap represents an area where no trading takes place. On the Japanese candlestick chart, a window is interpreted as a gap. In an upward trend, a gap is produced when the highest price of one day is lower than the lowest price of the following day. Thus, in a downward trend, a gap occurs when the lowest price of any one day is higher than the highest price of the next day. For example, the price of a share reaches a high of $30.00 on Wednesday, and opens at $31.20 on Thursday, falls down to $31.00 in the early hour, moves straight up again to $31.45, and no trading occurs in between $30.00 and $31.00 area. This no-trading zone appears on the chart as a gap. Gaps can play an important role when spotted before the beginning of a move. Types of gaps There are four different types of gaps, excluding the gap that occurs as a result of a stock going ex-dividend. Since each type of gap has its own distinctive implication, it is very important to be able distinguish between such gaps.

Breakway gap: It occurs when prices break away from an area of congestion. When the price is breaking away from a triangle (Ascending or Descending) with a gap then it can be implied that change in sentiment is strong and coming move will be powerful. One must keep an eye on the volume. If it is heavy after the gap is formed then there is a good chance that market does not return to fill the gap. When the price is breaking away on a low volume, there is a possibility that the gap will be filled before prices resume their trend. Common gap: It is also known as area gap, pattern gap or temporary gap. They tend to occur when trading is bound between support and resistance level on a short span of time and market price is moving sideways. One can also see them in price congestion area. Usually, the price moves back or goes up in order to fill the gaps in the coming days. If the gap is filled, then they offer little in the way of forecasting significance. Exhaustion gap signals end of a move. These gaps are associated with a rapid, straight-line advance or decline. A reversal day can easily help to differentiate between the Measuring gap and the Exhaustion gap. When it is formed at the top with heavy volume, there is significant chance that the market is exhausted and prevailing trend is at halt which is ordinarily followed by some other area pattern development. An Exhaustion gap should not be read as a major reversal. Measuring Gap: Also known as Runaway Gap, a Measuring gap is formed usually in the half way of a price move. It is not associated with the congestion area, it is more likely to occur approximately in the middle of rapid advance or decline. It can be used to measure roughly how much further ahead a move will go. Runaway gaps are not normally filled for a considerable period of time.

Caution It is quite possible that confusion between measuring gap and exhaustion gap can cause an investor to position himself incorrectly and to miss significant gains during the last half of a major uptrend. Keeping an eye on the volume can help to find the clue between measuring gap and exhaustion gap. Normally, noticeable heavy volume accompanies the arrival of exhaustion gap. Trading gaps for profit Some market speculators "Fade" the gap on the opening of a market. This means for example that if the S&P 500 closed the day before at 1150 (16:15 EST) and opens today at 1160 (09:30 EST), they will short the market expecting this "upgap" to close. A "downgap" would mean today opens at for example 1140, and the speculator buys the market at the open expecting the "downgap to close". The probability of this happening on any given day is around 70%, depending on which market you look at. Once the probability of "gap fill" on any given day or technical position is established, then the best setups for this trade can be identified. Some days have

such a low probability of the gap filling that speculators will trade in the direction of the gap. Combining Candlestick Signals and Gaps - Technical Analysis Chart Formations Technical analysis chart formations provide high profit return potential when using Candlestick signals. Candlestick analysis involves the visual identification of patterns that have been recognized for hundreds the years. Identifying technical analysis chart formations that have produced a statistical probability result makes for an excellent trading format. One of the most powerful technical analysis chart formations is the gap. Gaps occurring at different locations in a trend have different meanings. Taking advantage of what they reveal becomes highly profitable. Dissecting the implications of a gap/ window makes its appearance easy to understand. Where a gap occurs is important. The ramification they reveal in a chart pattern is an important aspect to Japanese Candlestick analysis. Some traders make a living trading strictly from gap trading. Gaps (Ku) are called windows (Mado) in Japanese Candlestick analysis. A gap or window is one of the most misunderstood technical messages. It is usually advised by a good percentage of investment advisors to not buy after a gap. The explanation being that it is too dangerous to predict what will happen next. That advice usually comes from somebody that does not know how to use gaps successfully. Gaps reveal powerful high profit trades. Candlestick signals, correlated with the appearance of a gap, provide high-probability profitable trade set-ups. The unique built-in forces, encompassed in the Candlestick signals, and the strength of a move revealed by the existence of a gap, produce powerful trading factors. The knowledge of what this combination of signals reveal will produce consistent and strong profits. These technical analysis chart formations are not hidden secret signals or newly discovered formulas that are just now being exposed to the investment world. These are a combination of widely known but little used investment techniques. Candlestick signals obviously have a statistical basis to them or they would not still be in existence after many centuries. Gaps have very powerful implications. Combining the information of these two elements produces investment strategies that very few investors take the time to exploit. Consider what a window or gap represents. In a rising market, it illustrates prices opening higher than any of the previous days trading range. What does this mean in reality? During the non-market hours, something made owning a stock, or any other trading entity, tremendously desirable. So desirable that the order imbalance opens the price well above the prior day's body as well as the high of the previous day's trading range. As seen in Figure 1, note the space between the high of the previous day and the low of the following day.

Witnessing a gap or window at the beginning of a new trend produces profitable opportunities. Gaps formed at the beginning of the trend reveal that upon the reversal of direction, the buyers have stepped in with a great amount of zeal. A common scenario is witnessing a prolonged downtrend. A Candlestick signal appears; a Doji, Harami, Hammer, or any other signal that would indicate that the investor sentiment is changing. What is required to verify a Candlestick reversal signal at the bottom? More buying the next day! A bullish candle indicates a reversal has occurred. A gap-up bullish candle indicates that a reversal has occurred with extraordinary force. Many investors are apprehensive about buying a stock that has popped up from the previous day's close. A risky situation! The hesitancy is caused by the percentage move. When most investors are happy with a 10% return annually, it is hard for an investor to commit funds to a position that has moved 12% in one day. Understanding what the gap-up represents eliminates that fear. A Candlestick investor has been forewarned that the trend is going to change, viewing the Candlestick signal as the alert. A gap-up, illustrating buyer enthusiasm, reveals excessive strength. Use the gap as a strength indicator. The fact that the initial move is substantial should act as an indication that the remaining move of this new trend could be more substantial. Always keep in mind, the markets do not care what investors fears and perceptions are. A price that has moved dramatically in one day may be cause for fear to enter a trade from most investors. They do not have the knowledge to understand what that strong move illustrates for the future.

Gaps form in many different places and forms. Some are easy to see, some need to be recognized. Utilizing the technical analysis chart formation information provides the capability to be involved with high profit trades. The information provided from the combination of a Candlestick buy signal or sell signal, followed by a gap, reveals an immense amount of information. And being able to analyze the technical analysis chart formation correctly provides an investor with the opportunity to make good consistent profits. Technical Analysis of Stocks - Candlestick Analysis of Bad News Gaps The ultimate poop trade! Technical analysis of stocks become much easier when able to interpret what investor sentiment is demonstrating. Candlestick analysis incorporates common sense investor concepts into graphic depictions. Understanding how to interpret what investor sentiment is doing after specific market movement will greatly enhance your profit potential. The technical analysis of stocks present a multitude of price movements. A highly profitable opportunity is usually presented in bad news gap-downs. Consider the following situation. You just recently bought a position because of a very good bullish signal. All confirmation is positive, it moves up nicely the first day. THEN, the dreaded news; the company issues an earning warning, the SEC announces a surprise audit, a contract gets cancelled. Whatever the news, the price drops 20%, 30% or greater. The question is what to do now? Do you sell the stock, take a loss and move on? Do you trade it at the new levels? Do you hold and/or buy more at these levels? What is the best course of action? Traders and long term investors will have completely different outlooks. The traders bought the stock a few days back due to specific parameters for making that trade. They should consider liquidating the trade immediately and move their money to better probabilities. The reason for putting on the trade, for a short term trade, has completely disappeared after the massive down-move. The longer term investor has a few more analytical options for gap analysis. They may want to hold the position because the Candlestick formations indicate that the price will move back up or liquidate because the Candlestick signal shows further decline. Reading the signals becomes an important element in knowing what to do in a bad news situation. A bad news gap-down has a multitude of possibilities after the move. The prior trend gives you valuable information on how to react to the move. Of course, the news is going to be a surprise or there wouldn't be the gap-down. Analyzing the trend prior to the move gives you a good idea of how much of a surprise the announcement or news bulletin is. For example, IBM recently reported lower earning expectations. The price gapped down. However, you have to analyze whether this news was a complete surprise or whether the gradual decline in the stock price was the anticipation of the coming

news. As can be seen in the IBM chart, the price had been declining for three months before the actual news was announced. The smart money was selling from the very top, months ahead of time. It was the die-hards that held on until the bad news was reported. As the chart shows, the final gap-down produced a Long Legged Doji, massive indecision. From that point the buyers and the sellers have held the price relatively stable for the next few weeks. This now becomes one of the few times that a technical analysis has to revert back to fundamental input. Unless you believe that the markets in general are ready for a severe downtrend, consider what the chart is telling you. The price of IBM stock was reduced from $125.00 per share down to $87.00 per share. The last down-move produced a Doji. The price has not moved from that level for two weeks. IBM

Now, the fundamental input. IBM is a major U.S. company, well respected, and known to have excellent management personnel. And like any other quality company, it has made marketing or production mistakes from time to time through the years. The announcement that they made that knocked the price down, whether it was an

earnings warning, shutting down a product line, or whatever, the factors that were announced as the result of the problem did not surprise company management. They knew that there were problems well before the news announcement. Being intelligent business people, the management of IBM was aware of the problems and had been working on the solutions months before they had to announce. When the announcement was made, probably many strides had already been taken to correct whatever problems caused the price to drop. For the long term investor, it would not be unusual to see the price of IBM move back up to at least the level from where it last gapped down, at approximately $100. This still provides a 15% return. You can chart your own course through common sense technical analysis of stocks. Watching for a Candlestick buy signal gives you the edge. IBM is not going out of business. Who was buying at these levels when everybody was selling? The smart money! Are the professional analysts of Wall Street recommending to buy at these levels? Probably not! But watch the price move from $85.00 back up to $95.00, then you will see the brave million dollar analysts say it is time to buy. Practical hands-on analysis, being able to see the buy signals for yourself, will keep you ahead of the crowd.

Windows (Gaps)
Windows as they are called in Japanese Candlestick Charting, or Gaps, as they are called in the west, are an important concept in technical analysis. Whenever, there is a gap (current open is not the same as prior closing price), that means that no price and no volume transacted hands between the gap.

A Gap Up occurs when the open of Day 2 is greater than the close of Day 1. Contrastly, a Gap Down occurs when the open of Day 2 is less than the close of Day 1. There is much psychology behind gaps. Gaps can act as: Resistance: Once price gaps downward, the gap can act as long-term or even permanent resistance. Support: When prices gap upwards, the gap can act as support to prices in the future, either long-term or permanently. Windows Example - Gaps as Support & Resistance The chart below of eBay (EBAY) stock shows the gap up acting as support for prices.

Often after a gap, prices will do what is referred to as "fill the gap". This occurs quite often. Think of a gap as a hole in the price chart that needs to be filled back in. Another common occurance with gaps is that once gaps are filled, the gap tends to reverse direction and continue its way in the direction of the gap (for example, in the chart above of eBay, back upwards). The example of eBay (EBAY) above shows the gap acting as support. Traders and investors see anything below the gap as an area of no return, after all, there was probably some positive news that sparked the gap up and is still in play for the company. The chart below of Wal-Mart (WMT) stock shows many instances of gaps up and gaps down. Notice how gaps down act as areas of resistance and gaps up as areas of support:

Gaps are important areas on a chart that can help a technical analysis trader better find areas of support or resistance. For more information on how support and resistance work and how they can be used for trading, (see: Support & Resistance). Also, Gaps are an important part of most Candlestick Charting patterns; (see: Candlestick Basics) for a list of candlestick pattern charts and descriptions.

Analyzing Chart Patterns: Gaps

A gap in a chart is essentially an empty space between one trading period and the previous trading period. They usually form because of an important and material event that affects the security, such as an earnings surprise or a merger agreement. This happens when there is a large-enough difference in the opening price of a trading period where that price and the subsequent price moves do not fall within the range of the previous trading period. For example, if the price of a companys stock is trading near $40 and the next trading period opens at $45, there would be a large gap up on the chart between these two periods, as shown by the figure below.

Figure 1

Gap price movements can be found on bar charts and candlestick charts but will not be found on point-and-figure or basic line charts. The reason for this is that every point on both point-and-figure charts and line charts are connected. It is often said when referring to gaps that they will always fill, meaning that the price will move back and cover at least the empty trading range. However, before you enter a trade that profits the covering, note that this doesnt always happen and can often take some time to fill. There are four main types of gaps: common, breakaway, runaway (measuring), and exhaustion. Each are the same in structure, differing only in their location in the trend and subsequent meaning for chartists.

Common Gap As its name implies, the common gap occurs often in the price movements of a security. For this reason, it's not as important as the other gap movements but is still worth noting.

Figure 2: Common Gap

These types of gaps often occur when a security is trading in a range and will often be small in terms of the gap's price movement. They can be a result of commonly occurring events, such as low-volume trading days or after an announcement of a stock split. These gaps often fill quickly, moving back to the pre-gap price range. Breakaway Gap A breakaway gap occurs at the beginning of a market move - usually after the security has traded in a consolidation pattern, which happens when the price is nontrending within a bounded range. It is referred to as a breakaway gap as the gap moves the security out of a non-trending pattern into a trending pattern.

Figure 3: Breakaway gap

A strong breakaway gap out of a period of consolidation is considered to be much stronger than a non-gap move out. The gap gives an indication of a large increase in sentiment in the direction of the gap, which will likely last for some time, leading to an extended move. The strength of this gap (and the accuracy of its signal) can be confirmed by looking at that volume during the gap. The greater the volume out of the gap, the more likely the security will continue in the direction of the gap, also reducing the chances of it being filled. While the breakaway gap generally doesn't fill like the common gap, it will in some cases. The gap will often provide support or resistance for the resulting move. For an upward breakaway gap, the lowest point of the second candlestick provides support. A downward breakaway gap provides resistance for a move back up at the highest price in the second candlestick. The breakaway gap is a good sign that the new trend has started. Runaway Gap (Measuring Gap) A runaway gap is found around the middle of a trend, usually after the price has already made a strong move. It is a healthy sign that the current trend will continue as it indicates continued, and even increasing, interest in the security.

Figure 4: Runaway (or measuring) gap

After a security has made a strong move, many of the traders that have been on the sideline waiting for a better entry or exit point decide that it may not be coming and if they wait any longer they will miss the trade. It is this increased buying or selling that creates the runaway gap and continuation of the trend.

Volume in a runaway gap is not as important as it is for a breakaway gap but generally should be marked with average volume. If the volume is too extreme, it could signal that the runaway gap is actually an exhaustion gap (discussed further in the next section), which signals the end of a trend. The runaway gap forms support or resistance in the exact same manner as the breakaway gap. Likewise, the measuring gap does not often fill, and there's cause for concern if the price breaks through the support or resistance, as it is a sign that the trend is weakening - and could even signal that this is an exhaustion gap and not a runaway gap. Exhaustion Gap This is the last gap that forms at the end of a trend and is a negative sign that the trend is about to reverse. This usually occurs at the last thrusts of a trend (typically marked with panic or hype), but can also be the point when weaker market participants start to move in or out of the security. The exhaustion gap usually coincides with an irrational market philosophy, such as the security being touted as "a can't-miss opportunity" or conversely as something to "avoid at all costs".

Figure 5: Exhaustion gap

To identify this as an exhaustion gap or the last large move in the trend, the gap should be marked with a large amount of volume. The strength of this signal is also increased when it occurs after the security has already made a substantial move.

Because the exhaustion gap signals a trend reversal, the gap is expected to fill. After the exhaustion gap, the price will often move sideways before eventually moving against the prior trend. Once the price fills the gap, the pattern is considered to be complete and signals that the trend will reverse. Island Reversal One of the most well-known gap patterns is the island reversal, which is formed by a gap followed by flat trading and then confirmed by another gap in the opposite direction. This pattern is a strong signal of a top or bottom in a trend, indicating a coming shift in the trend.

Figure 6: Island reversal pattern

Above is an example of an island-bottom reversal that occurs at the end of a downtrend. It's formed when an exhaustion gap appears in a downtrend followed by a period of flat trading. The pattern is confirmed when an upward breakaway gap forms in the price pattern. The size of the trend reversal or the quality of the signal is dependent on the location of the island in the prior trend. If it happens near the beginning of a trend, then the size of the reversal will likely be less significant. Gaps create very strong levels of support and resistance At Learning Markets we tend to focus more on price patterns, support and resistance and candlesticks over technical indicators when using technical analysis. This is useful because the data doesnt lag like a technical indicator does.

Trading Gaps Part One

When the price moves in a given market we can see buy and sell signals in real time using price patters rather than waiting for the data to be filtered over time within a technical indicator. Gaps are an example of a price pattern that can provide very dramatic trading signals. Gaps occur when the market opens a session higher than the previous high or lower than the previous low. Gaps look like a blank space in a bar or candlestick chart between two trading sessions. They are most common in markets that close and do not trade overnight. Gaps are sometimes ignored or misunderstood by traders. One of the reasons this may be true is the emergence of gapless markets like the Forex. However, once you understand the drivers behind a price gap, these same signals can be found within a gapless market as well. To begin this series of articles I will define three of the most common gaps usually seen on a price chart. I am using Apple, Inc. (AAPL) in this case study so that you can evaluate the same signals within your own charting application as you practice identifying gaps. Common Gaps A common gap is usually small and occurs when a stock is channeling or consolidating in a tight range. In the chart below you can see an example of this kind of gap as the red areas on Apple, Inc. (AAPL). A common gap is not very useful because it occurs within a range bound market. Because range trading is very common this is the kind of gap you will see most often.

Breakaway Gaps Periodically a stock will break out of a trading range and break support or resistance levels. When that occurs with a price gap the signal is definitely one traders should pay attention to. In the chart below you can see this kind of bullish breakaway gap on AAPL when the market broke out of a consolidation pattern and gapped above resistance.

Continuation Gaps A continuation gap occurs when the market is already strongly trending one direction or the other and a gap between two trading periods occurs. Like breakaway gaps, a continuation gap to the upside is considered bullish and a continuation gap to the downside is bearish. In the chart below you can see a continuation gap that occurred after a breakaway gap in AAPL.

Gaps are caused by information or changes in investor sentiment that is released when the market is closed or not trading. This is seen most often in stocks and option markets where premarket and postmarket news is common. That news can change the perceived value of a stock and the buy/sell equilibrium will be different at the next open from the prior close. In the next section I will cover some of the basic ideas around using gaps to identify support and resistance, buy signals and changes in investor sentiment. You will also learn how the causes of gaps can be identified in gapless markets so that the same signals can be traded there. Breakaway gaps are useful indicators for a resumption of a trend following a consolidation pattern or an emerging new trend. These gaps happen when investor sentiment shifts strongly and usually represent a much larger than average price move. Because these shifts are so large they are usually accompanied by very large volume.

Trading Gaps Part Two

In the last section I illustrated a breakaway gap occurring on Apple, Inc. (AAPL) that followed a short pennant formation. That is a very typical scenario for this kind of gap pattern to occur. You can see a second example of a breakaway gap in a similar situation in the chart below.

Apollo Group, Inc. (APOL) channeled between $50 and $60 a share for most of October. That channel was interrupted on 10/29 when the company filed its annual report with the SEC. The new information within the report was obviously good news for investors who moved into the stock forcing it to open above the previous high on strong volume. A gap like this is clearly a bullish signal but it also establishes an inflection point on the chart that is likely to act as support in the future. It is common for a stock to continue higher following a breakaway gap and then return to the top of the gap and bounce higher again. You can see this on the chart above with a bounce in late November.

When this happens to the downside traders refer to it as a dead cat bounce. You can see an example of a bearish breakaway gap with a subsequent resistance bounce in the chart below. Shorting a stock at the initial gap or at the bounce is a strategy popular among shorter term traders.

As you can see in the chart of Exxon Mobil (XOM) the break away gap on 6/22 occurred on high volume and ultimately lead to 4 moderate resistance (dead cat) bounces. A breakaway gap will frequently turn into a fairly solid support or resistance level and those levels should be monitored as the market approaches them. Sometimes breakaway gaps will occur in a series of two opposing breakouts. These are often called island-reversals. An island reversal is a very important signal that sentiment in the market is overextended and a change in trend is coming. For example, a bearish island reversal would consist of a bullish breakaway gap followed by a short consolidation and then a bearish breakaway gap. You can see an example of this formation in the chart below.

Charts courtesy of Metastock. For a free trial click here. The breakaway gap that occurred in April on Google (GOOG) looked good but ultimately it only led to a downward sloping channel. Smart technicians could have turned this failed long position into a profitable short trade once the bearish breakaway gap in July turned this pattern into an island reversal. A breakaway gap is most relevant when it occurs on a breakout from a consolidation or channel on higher than average volume and a larger than average price move. The conditions of a breakaway gap are not always as idealized as the examples shown in this article so take some time to practice identifying them on your own. Like breakaway gaps, a continuation gap represents a shift in investor sentiment. Specifically, a continuation gap on higher than average volume represents renewed interest in the current trend. A continuation gap reflects that increased interest with higher than average volume and a bigger than average price move.

Trading Gaps Part Three

Because a continuation gap occurs in the middle of a trend, it is a significant warning that risk is very high for counter-trend traders and may be an interesting entry opportunity for new trades. A continuation gap can occur within a down trend or an up trend. You can see an example of this kind of gap in the image below.

In the image above, Apple, Inc. (AAPL) gapped up in the middle of a trend. This continuation gap occurred following a breakaway gap a couple weeks earlier, which is not uncommon. The higher than average volume level confirmed the new buying demand behind this gap. The appearance of so many continuation gaps towards the end of 2008 was a big tip-off that the stock market was in serious trouble. You can see an example of this in the chart below.

You will find that like most analytical methods there is room for personal preference and interpretation. The definitions of breakaway, common and continuation gaps overlap and experience is needed before you will feel fully comfortable taking trades based on these price patterns. As you practice identifying gaps there are a few more concepts you should keep in mind. Most gaps close eventually Gaps are like a vacuum on the price chart. Most large gaps will be filled within a year. The average time for a gap to be filled in the stock market is 3 months. This means that if a stock gaps down there is a very high likelihood that prices will come back up and through the gap within a year. The same is true of bullish gaps but in reverse. This means that using gaps as a trading signal is a short term strategy. However, even long term traders can benefit from the analysis by using gaps to time new entries or periods of time when risk is higher and hedging is needed. Not all markets gap The retail forex is a classic example of a gapless market because it is open 5 days a week and 24 hours a day. However, the same psychology that causes a gap in stocks exists in the forex. A much larger than average move following unexpected news represents the same kind of underlying forces that cause a gap in a stocks price. You

can see an example of a continuation gap and dead cat bounce in the chart of the USD/CHF currency pair below.

Volatility = Higher Risk An immutable law of the markets is that when there is greater profit potential there is higher risk. Gaps are inherently volatile and unusual market volatility is hard to predict. Gaps are attractive trading opportunities because the subsequent price moves can be very large. However, sudden reversals, market exhaustion and whipsaws are also common. Some traders may use stop losses and tight money management to deal with this risk while others may use options to try and limit risk. In either case, the important principle is to control your risk and to be alert to changes in the market. Practicing gap trading in a paper-trade account is also a good way to make sure you understand the risks and nuances of trading short term price patterns like gaps before putting real money at risk.

The Opening Gap Trading System

The opening gap trading system is a widely used methodology based on sound statistical probabilities. It is highly effective with index, currency and commodity futures and some of the more volatile equities and ETFs. Opening gaps are created when an instrument experiences significant trading activity between the close of the market on one day and the open of the market the next day. They are created by news events or highly volatile trading conditions. The volume and volatility of after hours trading activity determines the size of the opening gap. For example, if sellers step in and drive the share price down significantly in pre market trading, a large gap down will be created. The opposite applies if buyers predominate between market close on one day and open the next. A large gap up will result. Why opening gaps can be traded There is a weight of statistical evidence to show that 70% of opening gaps are filled during that trading session. This creates trading opportunities with a high probability of success, although it is by no means certain that a gap will be filled and the trader must assess his risks accordingly. Opening gaps are faded which means that a gap down has a high probability of being filled by buyer stepping in to drive the share price upwards to at least yesterdays closing price. A gap up is likely to be closed by sellers driving the share price downwards to meet yesterdays closing price. Because there is a high expectancy that a gap will be filled, you very frequently see a partial gap fill as traders fade the fade. What this means is that in an gap down, buyers assume that the gap up will be filled and buy accordingly. The share price moves upwards towards the gap fill point, however before gap fill is reached, significant selling volume occurs which stalls the upward momentum and then drives the price back downwards again towards todays opening price. You can see an example of an opening gap up in this image. the successful trade in this case was a short at the opening price as sellers fade the gap up. This results in a profitable trade with a high probability of success.

Archive of Trading Education Articles

Five Tips for Trading Gaps

By Alan Farley, founder and publisher of Hard Right Edge* Posted: Jun 25, 2010 Gaps are events that jolt price up or down, leaving an open window to the last bar. Market folklore offers guidance on trading gaps, but classic wisdom such as "gaps get filled" doesn't tell us how to make profitable decisions when a gap suddenly appears on a favorite chart. So, how can traders take advantage of these unique price patterns? First, we need to figure out what kind of gap we're dealing with. Certain trades work best with each gap type, so it is important to identify what type you're seeing. Traders should look at relative location to place gaps in the right category. In most cases, gaps will fall into one of three groupings: 1. Breakaway gaps appear as markets break out into new trends, up or down 2. Continuation gaps print approximately halfway through trends when enthusiasm or fear overpowers reason. 3. Exhaustion gaps burn out trends with one last surge of emotion and price movement.

Now, let's look at five tips for trading gaps effectively. Tip 1: Use Market Psychology, as well as Price Location, to Identify the Gap Type Generally speaking, gaps also fall into one of three "emotional" categories: 1. Breakaway gaps "surprise" because they appear suddenly on charts you've ignored.

Continuation gaps "exhilarate" because they pay off big as momentum accelerates. 3. Exhaustion gaps "frustrate" because they show up when your analysis points to a reversal. Tip 2: Align Your Entry and Exit Strategy to the Specific Gap Type

2.

For example, watch as an exhaustion gap shows up after a long rally or selloff. Then, enter the trade in the opposite direction of the trend in place before the gap occurs. These phenomena often mark the end of up or down trends, with this last burst of energy signaling a climax, ahead of a sharp swing in the opposite direction. After an up trend, these gaps offer great signals to take profits on long positions and to enter new short sales. Alternatively, you can use them to cover short sales after down trends and enter new long positions. However, in both types of trends, it's best to get signal confirmation using technical indicators before taking new positions. Here's a second example of gap and strategy alignment. Trade the primary trend on the first pullback to a breakaway or continuation gap. The odds favor a reversal back in the direction of the trend even if these types of gaps get filled. So, it makes sense to buy the low volume decline after a notable rally, or sell the low volume bounce after a notable selloff. Markets often retest breakaway gaps right after they occur, but many bars can pass before price returns to test a continuation gap. Also, you can't trade a continuation gap if you can't find it, so here's an old technician's trick: Wait until you can count three distinct moves, up or down. Then, measure out the trend from start to finish, and look for a gap at the 50 percent level.

Once you've located the continuation gap, place a limit order within its boundaries and wait for a test to occur. The retracement, or move against the primary trend, should find support within the gap and reverse. However, as you can see with AK Steel, continuation gaps may fill for a few bars before they reverse. So, a defensive strategy will stand aside until the stock moves forcefully in the other direction before entering the position. Tip 3: Know Your Time Frame

Examine gaps on the intraday and daily charts to get a clear view of support and resistance levels. Gaps cut through all time frames and trends but represent different phenomena in each one. For example, note how the exhaustion gap of the AKS Steel January to April rally is also the continuation gap of the smaller March to April rally. In addition to this "3D" gap analysis, take time to distinguish between gaps in the direction of the trend and those moving against it. Countertrend gaps are especially important when they occur near big highs or lows. For example, a selloff gap right after a strong rally can produce considerable fear that often triggers good short sale entries. Gaps through support and resistance levels can signal major break-outs and breakdowns. Crowd emotions build so strongly at these price levels that the gap can set off a strong trend with rapid price change. Moreover, the greed or fear induced by these breakaway gaps can trigger additional gaps as the trend builds momentum. Gaps that show up within narrow sideways patterns show less persistence and often fill with little warning or volume. These "common" gaps have little predictive value, so traders should avoid using them to make entry or exit decisions. Of course, the challenge once again lies in recognizing the correct gap type when it prints.

Tip 4: Mark Out Price Levels on Gaps to Find Key Decision Points No easy formula shows traders how far a gap can travel and still remain healthy. But, it's best to apply common sense when observing pre-market action above or below the last closing price. The most important question for traders to consider at that time is this: Does the news or market environment justify the gap you'll see when the market opens? Many traders place market orders before the open to get into their favorite gap plays. Unfortunately, this practice often yields the worst fills imaginable. So, it's better to take a few minutes after the open to plan your gap entry while you wait for better prices. In that regard, here are several gap entry strategies you can use when the session gets underway.

Find your entry by standing aside at the open and marking out the first-hour range on a 15-minute chart, with lines at the high and low. Then, take the trade when price finally moves out of this range even if it's a few days later. Alternatively, more aggressive traders can apply this strategy to the first half hour of the session, but tighter stops are required to manage the higher risk. A buy signal issues when price exceeds the high of the range after an up gap. A sell signal issues when price exceeds the low of the range after a down gap. It's a relatively simple strategy that can get you into many profitable trades. But, if you decide to use this technique, a few caveats are in order to avoid whipsaws and other unprofitable traps. First, the initial swing in either direction might last longer than anticipated, so stay flexible. If a trading range builds in 50 or 70 minutes instead of 60, go ahead and use those levels to define your range. Also, make sure to manage risk proactively

because the range break might extend just a few pennies and then whipsaw in the other direction. More defensive traders should stick with the first-hour-range strategy and avoid very short-term entry signals. An even lower risk approach is to let other market players take the bait during these range break-outs while you sit back, looking for midday pullbacks or consolidation patterns.

Countertrend movement after a gap generates other types of trading opportunities. The most obvious takes place at the support line in an up gap. We'll call these "reverse break" lines. Violation of the reverse break can trigger a quick selloff toward the gap fill line. This surge makes sense because everyone who enters an opening position in the gap direction is losing money when price falls out of the trading range. The gap fill line marks support in an up gap and resistance in a down gap. The odds favor a swing in the other direction when it gets hit. However, this is a bad spot to enter positions because the reverse break line marks new resistance that must be overcome. The conflict between the lines can trigger whipsaws, until one side finally gives way. The stock issues a renewed buying signal when it remounts the reverse break line and reenters the early trading range. In an up trend, this price action exposes hidden buying power that often precedes a rally to daily highs. The risk after this signal is well managed by placing a stop loss just below the reverse break line.

Tip 5: Gaps Have Memory

Finally, keep in mind that gaps can come back into play months or years later. For example, look for a major up gap to offer support even when it took place one or two years ago. For this reason, smart traders always look back at history when examining a favorite chart to identify any gaps that might help or hurt the position they want to take.

Doji and Gap Combinations = Power Profits

The Doji is one of the most revealing signals in Candlestick trading. It clearly indicates that the bulls and the bears are at an equilibrium, a state of indecision. The Doji appearing at the end of an extended trend has significant implications. The trend may be ending. Just this fact alone creates a multitude of investment programs that produce inordinate profits. What is the best method for making big trading profits? Knowing the direction of a trading entity and the strength of that move. Candlestick analysis perfects that trading strategy. Candlestick formations reveal high probability profitable reversals. Hundreds of years of investing refinement has proven that point. The Japanese say that whenever a Doji appears, always take notice. A well-founded rule of Candlestick followers is that when a Doji appears at the top of a trend, in an overbought area, sell immediately. Conversely, a Doji seen at the bottom of an extended downtrend requires buying signals the next day to confirm the reversal. Otherwise, the weight of the market could take the trend lower. What could be better than knowing which way a market or a trading entity is going to move? One additional important element! How powerful is that new move going to be? A powerful indication that a strong trend is beginning is the appearance of a window or gap. Gaps (Ku) are called windows (Mado) in Japanese Candlestick analysis. A gap or window is one of the most misunderstood technical message. It is usually advised by a good percentage of investment advisors to not buy after a gap. This is very bad advice. The gaps will reveal powerful high profit trades. Candlestick signals, correlated with the appearance of a gap, provide valuable profit making setups. The ramification of a gap pattern is an important aspect to Japanese Candlestick analysis. Some traders make a living trading strictly off of gaps. Dissecting the implications of a gap/window makes its appearance easy to understand. Once you understand why a gap occurs in different locations in a trend, taking advantage of what the gaps reveal becomes highly profitable. Where a gap occurs is important. Consider what a window or gap represents. In a rising market, it illustrates prices opening higher than any of the previous days trading range. What does this mean in reality? During the non-market hours, something made owning this stock tremendously desirable. So desirable that the order imbalance opens the price well above the prior days body as well as the high of the previous days trading range (the same is true for a bearish indication, gapping down from the previous range). As seen in Figure 1, note the space between the high of the previous day and the low of the following day.

Figure 1 - Gap Formation.

Witnessing a gap or window at the beginning of a new trend produces profitable opportunities. Seeing the gap formed at the beginning of the trend reveals that on a reversal of direction, the buyers have stepped in with a great amount of zeal. A common scenario is witnessing a prolonged downtrend. A Doji appears, indicating that the selling may have stopped. To verify that the downtrend has stopped, indication of buying the next day is required. This can be more pronounced if the next day has a gap up move. Many investors are apprehensive about buying a stock that has popped up from the previous days close. A risky situation! Yet a Candlestick investor has been forewarned that the trend is going to change, using a signal as that alert. A gap up illustrates that the force of buying in the new upward trend is going to be strong. The enthusiasm shown by the buyers trying to get into the stock demonstrates that the new trend should have a strong move to it. Use that gap as a strength indicator.

Doji and Gaps at the Bottom

Knowing that a gap represents an enthusiasm for getting into or out of a stock position creates the forewarning that a strong profit potential has occurred. Where is the best place to see rampant enthusiasm when you are buying? At that point you are buying, near the bottom. Obviously, seeing a potential Candlestick buy signal at the bottom of an extended downtrend is a great place to buy. In keeping with the concepts taught in Candlestick analysis, we want to be buying stocks that are already oversold to reduce the downside risk. What is even better is the evidence that buyers are very anxious to get into the stock.

Note in Figure 2, XMM, Cross Media Marketing, after Doji/Harami's, one on November 5th, another on December 18, 2001, that the gap up the next day clearly indicated that the trend had stopped. The resulting trades produced 28.5% and 49.3% respectively. Probabilities demonstrate that a gap up is going to preclude an advance in price under these circumstances. Unofficially, candlestick statistics illustrate an 80% and better probability that a trade will be successful when stochastics are oversold, a Candlestick buy signal appears, and prices gap up. (The Candlestick Trading Forum provides candlestick statistics that they represent as unofficial. Even though over fifteen years of observations and studies have been involved, no formal data gathering programs have been fully operated. However, currently the Candlestick Trading Forum is involved with two university studies to quantify signal results).

Having this statistic as part of an investors arsenal of knowledge creates opportunities to extract large gains out of the markets. The risk factor remains extremely low when participating in these trade set-ups. Many investors are afraid to buy after a gap up. The rationale being that they dont like paying up for a stock that may have already moved 3%, 5%, 10% already that day. But this rationale is unimportant to the Candlestick investor. Witnessing a Candlestick buy signal prior to the gap up provides a basis for aggressively buying the stock. If it is at the bottom of a trend, that 3%, 5%, 10% initial move may just be

the beginning of a 25%, 30%, 40% move or a major trend that can last for months.

Doji and Gaps at the Top

Gaps and windows reveal a strong force in a direction whether it is bullish or bearish. The Candlestick signal is the prime factor for looking for a reversal. A gap down after a sell signal verifies that the signal was effective. The Japanese say that a Doji at the top of a sustained trend warrants immediate liquidation. That becomes more evident if the prices gap down the next day. Note in Figure 3, ISSI, Integrated Silicon Solutions, the Doji at the top, with stochastics in the overbought area, would have been the warning. If investors were long, upon seeing the Doji, they should liquidate at the first sign of a weaker open. The gap down the next day would have been more than enough to convince the Candlestick investor that the sellers had stepped in. Figure 3, ISSI, Integrated Silicon Solutions

The investor that does not utilize the information revealed by gaps/windows is leaving massive profits for somebody else. Just as the Candlestick signals have different meanings at different points in a trend, the gaps have different messages at certain points in a trend. The Candlestick signals, signals that have imbedded information in their formation, combined with a gap/window, also a signal that implies a magnitude of buying or selling interest, creates one of the most powerful investment tools found in technical analysis. The major function of technical analysis is to find trade patterns that put probabilities highly in our favor. Hundreds of years of profitable observations have identified the Doji as a prime reversal signal. Gaps have demonstrated many times over that they are the driving force of a trend direction. The combination of these two indicators produce profits that cannot be ignored.

Gap-Up At The Bottom

There are technical analysis basics that can greatly enhance the production of extraordinary profits in the markets. Candlestick signals amplify the ability to identify high profit chart patterns. The visual aspects of Candlestick signals make evaluating high profit trades very easy. One of the technical analysis basics is identifying a Candlestick bullish signal followed by a gap-up. A gap, witnessed after a Candlestick buy signal, also has powerful implications. Knowing that a gap represents enthusiasm for getting into or out of a stock position creates the forewarning that a strong profit potential situation is about to occur or has occurred. Where is the best place to see rampant enthusiasm? At the point you are buying, near the bottom. Obviously, seeing a potential Candlestick buy signal, at the bottom of an extended downtrend is a great place to buy. In keeping with the concepts taught in Candlestick analysis, we want to be buying stocks that are already oversold, to reduce the downside risk. What is even better to see is the evidence that buyers are very eager to get into the stock. Reiterating the technical analysis basics of finding the perfect trades, as found in the book Profitable Candlestick Trading, having all the stars in alignment makes for better probabilities of producing a profit. The best scenario for a high profit trade is a Candlestick buy signal, in an oversold condition, confirmed with a gap-up the following day. As illustrated in the Bombay Company Inc., the uptrend was obviously instigated after a gap-up and large bullish candle following a Doji. The fact that prices gapped up was immediate demonstration that buyers wanted to get into this stock with great fervor.

Unofficially, statistics illustrate an 80% or better probability that a trade will be successful when stochastics are oversold, a Candlestick buy signals appears, and prices gap up. (The Candlestick Forum will offer our years of statistical figures as unofficial. Even though over fifteen years of observations and studies have been involved, no formal data gathering programs have been fully utilized. However, the Candlestick Forum is currently involved with two university studies to quantify signal results. This is an extensive program endeavor. Results of these studies will be released to Candlestick Forum subscribers upon completion.) Having this technical analysis basic statistic as part of an investor's arsenal of knowledge creates opportunities to extract large gains out of the markets. The risk factor remains extremely low when participating in these trade set-ups. Many investors are afraid to buy after a gap-up. The rationale being that they don't like paying up for a stock that may have already moved 3%, 8%, 10%, 20% already that day. Witnessing a Candlestick buy signal prior to the gap-up provides a basis for aggressively buying the stock. If it is a the bottom of a trend, that 3%, 8%, 10% or 20% initial move may just be the beginning of a 50% move or a major trend that can last for months.

Utilizing this technical analysis basic concept will dramatically increase the potential of profits being produced in one's portfolio. This is not difficult analysis. Candlestick analysis is the application of common sense investment practices put into graphic depiction.

Morning Reversal Gap Fill

by ADMIN on JUNE 12, 2011 Themorning reversal gap fill is another great trading setup for the first hour of trading, preferably within the first 20 to 30 minutes of trading.This strategy is a play on a shift in market momentum and is directly tied to market manipulation by the market maker on the open.As we discussed in our introduction to morning gaps, the market maker can legally manipulate the opening price of a stock and a reversal can occur under the right circumstances. It is very similar to the morning range breakout that we discussed but it is a gap and there are different factors driving the setup. The concept of filling a gap is almost a self-fulfilling prophecy as traders are trained to believe this will occur with a high probability.Additionally, this day tradingstrategy works especially well on large cap stocks as they accumulate larger levels of interest through institutional program trading.They are also more liquid and have tighter bid/ask spreads which enable minimal slippage, especially on thousands of shares. For fair disclosure, this is not one of my favorite setups. I do not like trading against the trend, it makes trading a bit more difficult in my opinion. Trading Rules In addition to looking for stocks with heavy volume, I like to limit these trading candidates to ones that exhibit a 3% to 7% gap on the open.Once you start seeing large trading gaps (ie. Over 10%), stocks tend to get stuck in a sideways trading range for the rest of the day.These stocks are typically down heavy on news related items, for which no one is willing to dedicate too much capital to. Beforewe get into the setup, I strongly recommend that traders follow these two rules: 1)Remember we talked about watching the general market to make sure that all boats were sailing in the same direction?It is essential that the broad market is moving in the anticipated direction of your trade or getting ready to do so.This will dramatically increase the odds of this trade working out. 2) This setup will work best when the stock gaps in the opposite direction of the primary trend. It has better odds of filling the gap if there is generally a strong bias to the upside. Now that we have that out of the way, lets take a look at the setup.Look for a short term rangeto setup after the gap.I like to see this range take no more than 30 minutes to develop.Take a look at our example below.

 This is a great example because it illustrates the principle of agility and discipline.Notice the range that develops on the Bank of America (BAC) chart.It is gaps lower after being in an uptrend (not shown on chart) and creates a very nice looking hammer on the opening bar.It then moves sideways mimicking a bull flag, indicating that there is strengthbefore challenging the 7.40 area.While we dont have the time and salesdata available at this point, we can assume that the volume wasnt terribly heavy on thesixth bar which broke resistance.It broke through it but did not accelerate.A trader that bought the breakout (as referenced by #1 in the chart) would have quickly seen that the trade reversed and should have been stopped out slightly below the breakout area. However, there was another chance to re-enter the trade, this time under better circumstances. On the next bar (referenced as #2), notice the big pickup in volume and the acceleration in price to blow out the resistance area. Now, this time, the trader would have been better served by waiting for the high of the previous bar to be cleared rather than the initial resistance. Notice how the stock moved higher in an explosive fashion on that bar and got close to filling the gap. The first thing that any trader should have done is move their stop up to at least breakeven, if not breakeven plus commission. Secondly, a volume spike of some sort came in near the area where the gap was. This was a potential trigger to sell a portion of their overall position. Money Management

As far as upside targets go, be flexible.The obvious target is for the stock to fill the gap; however, if it gets 80% there and puts in a nasty candlestick reversal pattern, do not be afraid to take your profits.I like to add the 10 EMA and20 EMA as many traders are keeping an eye on these moving averages.These can help identify shifts in momentum and trend changes.Again, they are a guide, not an absolute. Beginning traders were probably shocked the first time they experienced a stock price gap. I guess even the most experienced traders still get taken back when there is an unexpected stock price gap in a stock they are trading. Either way I wanted to cover once again why they happen and what you can do (if anything) to trade them. It Happens When The Market Is Closed Nearly all stock price gaps happen in pre market trading or during after hours trading. Call them Black Swans if you want since they seemingly come when you least expect it. Generally speaking gaps are rare for the normal stock. Most mutual funds, ETFs, and other illiquid assets actually gap more frequently which make the gaps less important. How The Actual Price Gap Is Created A price gap is created when a stock closes at say $91.50 (as AAPL did below) for the day which is at 4:00 PM EST and then the next day opens dramatically higher or lower than its previous closing price of $91.50. In after hours that same day or pre market trading the following morning, something newsworthy happens to create either a buying or selling frenzy. The result is a gap in the stock price when the market re-opens at 9:30 AM EST.

The most common reasons price gaps occur is because of earnings and acquisitions. The bigger the stock price gap, the more important or influential the reasoning behind it. Any major event that dramatically changes the value of a stock

today (or its future business value) will immediately effect the stock price when the market opens. Lets Look At A Real Life Example Using Netflix, Inc. (NFLX) as our classic example, you can visually see that the trading creates a gap in the daily candlesticks. What happened in this example to create the gap in NFLX stock? Well, the stock closed on 1/27/10 at $50.97, then reported earnings after the market closed which were much better than the analysts on Wall Street had expected. In after hours trading, NFLX stock traded higher to $63 on the earning excitement.

The next morning when the market opened it created the classic gap in the daily stock price of nearly 26%. This left this huge visual gap on the chart. Do Price Gaps Help Predict Future Moves? While the actual gaps themselves are virtually unpredicable stock price gaps are fairly good at predicitng the future price of a stock following the gap. Of course we would all like to know when a stock is going to gap higher so that we can buy it right? But its what happens after the gap that acutally can be very useful for you as a trader. A price gap up or down in price can actually be a determination of the overall direction the stock will move in the coming months. For the most part volume is the big indicator and confirmation sign during a price gap.

A stock price gap on very high volume like the one below means that strong institutional buying of the stock could send prices higher in the weeks and months to come. Like I said before, the size of the gap is also very important. Smaller gaps are less important and actually can happen on daily basis for some stocks. But its the large and obnaxious gaps that kind of jump off the screen that you should pay attention to when trading. Gaping Support/Resistance Levels Personally I like gaps for the technical importance they serve in determining strong areas of support and resistance. With stock prices gaps the whole area of the gaping window as its called can act as strong support and/or resistance going forward.

In the examples below, you can see that the gaping window successfully acted as S/R levels for these stocks following the initial gap. More experienced traders will look for an entry following a pull back in the stock that is much more favorable. How Do You Trade Gaps? Id like to hear from you as to how you like to trade gaps for earnings? Some people like to play the volatility move or the big gap higher with OTM Calls? Add your insight via Facebook below.

Trading Gaps
The vehicle you choose to trade for intra day trading depends on your execution platform, your commission structure, trading rules and your objectives. Most Professional Traders will choose to trade a very volatile and liquid market, thats why more and more of the Stock Jockeys move over to the Forex Market. Let start and jump into the deep end. Below I have two Charts of the recent EURUSD that opened with a gap a couple of weeks ago. Fig 1 Show the trend we are in and give and indication which direction to trade in. Note: I do not use the 1hr chart to plot my trading strategy merely to find the direction of the trend.

Fig 2 We use the 15min chart to find the divergence of the gap. However the 1hr and 4hr charts can be used as well but since we are trading a gap for a short period and maximum profit, best to stick to the 15min charts for the analysis and the entry points. On the other hand the 30 min or 1hr chart are used to find the exit points in this case we will look for pattern reversals i.e. hammers, tweezers, spinning tops etc. Fig. 1

Fig. 2

Entry Points
As a Professional Intraday Trader we trade Breakouts and Pull Backs after the breakout. These are simple rules that will benefit the growth of your equity over time and eliminates a lot of noise in the market when the technique is applied. Example. When triangles form in the market especially on daily charts normally after a breakout there is a gap the news has been absorbed into the market via the price swings and that creates attractive trades without any difficulty. Fig 1. When timing entries look out for swing highs and swing lows plus the length of the Swing Up & Swing Down. Here in Fig1 we notice clear Lower Highs and Lower Lows. We can see there was a clear drop, followed by a reaction a move to the upside - No 1 The 2nd leg down ensued by another reaction up. This classic ABC type move Rallies to Point A falls to a higher low Point B then rallies above Point A to Point C. This is a classic Momentum Divergence on the way up These are the best shorting signals - gabs can form in an Up Trend and can be traded the same way. Last leg down had a clear loss of momentum and the downward movement was not as great as the first leg lower. A convergence formed, making higher lows and breaking the trend line. This is the 1st swing greater than the previous down swing. This indicates that the market has changed its nature and now we switch from shorting to long the market, and buying the pullbacks. Daily charts display longer term moves as they filter out a lot of market noise, they tend to show smooth and consistent swings - easy to read, but analysis will not provide many trades. More active traders perform the same style of analysis on 15min charts and 1hr charts. Every good breakaway point will either have a gap or a large range increase with increasing volume. When looking at momentum indicator Point 1, where the oscillator far exceeds its previous high points. Here we can trade the pullbacks after this new momentum high. It is paramount to choose ahead of time are you long or short in the market. Dont work both sides, work the side with the most potential gain.

Taking advantage of pullbacks against the overall trend is an important part of this strategy. The moving average used here to spot pullbacks is the EMA 20, which works best for this time frame. Fig. 3 & Fig. 4 Shows the opposite for a gap in the Uptrend Fig.3

In all the 15 min charts Momentum Indicator is plotted against the Price Swing to find the Divergence Lines. Fig. 4

Aggressive Traders vs Conservative Traders. Aggressive Traders

Initiate a small scale entry if he perceive a slowing in the reaction. Conservative Traders Waits till the market starts to turn back towards its trend. It also depends on the liquidity of the market. Less liquid market traders will get a more advantageous price entering a long position when there are a lot of sellers and visa versa. Therefore we should try and enter before the market turns, as long as you are still confident that you are trading in the direction of the higher time frame. Never limit yourself trading the first two or three pull backs before a trend reversal is due. Never limit yourself in a strongly trending market.

Referring back to the EURUSD there are lots of pullbacks and it is still following lower. Be careful to enter late in the game as the market might be ready for a bigger shakeout or a sideways movement. Try to differentiate whether this is a normal trading environment or is there a more powerful force at work. It takes a lot of time to reverse a strong trending market There is usually an extended period of accumulation or distribution, so it would be extremely rare that a trend reverses on a dime without plenty of advance warning. Trend reversals are a process that often show up in a classic chart formations such as : Hammers Tweezers Morning Stars Evening Stars Crowns Double Bottoms Triple Bottoms

Remember daily charts offer cleaner, prettier and more symmetrical swings than charts with shorter time frames. By using the longer time frames, you get smoother data, less noise, and a clearer picture of the trend. These strategies I reveal here are very simple and works for me there are many strategies out there and a lot of books but it doesnt mean that simple classic analysis doesnt work. They worked in the past, they work now and they will work in the future.

It doesnt matter if you are a Short Term Aggressive Trader or a Long Term Conservative Trader, success depends on understanding the basic swing. It is most important whether the price is in an Up Trend making Higher Highs or a Down Trend making Lower Lows.

Managing a Trade

This simply means by placing an initial stop loss and following an exit strategy.

To achieve maximum profitability: 1. 2. 3. 4. Play for small wins as opposed to aim for large gains. Playing for larger gains use a trailing stop. Start to pull up your stop to break even when the trade starts to work Have a mechanism in place that forces you to take profits.

Time Stops This can done by having an initial fixed stop and a time stop. To do this you employ an 10 bar time stop in conjunction with a fixed stop on a 10 or 15 min chart use 10min & 15 time stops or in a daily chart use a 8 day time stop.

Finally it is important to minimize the risk of having a large loss. Traders end up with a big loss because they were hoping for a big profit. The best traders first learn to play good defense before going to the offense.

Secondly go where the action is dont pick dead markets that dont do anything hoping for a breakout. There are so many currency pairs available with good readable swings. Go where the volatility is and where supply and demand imbalances exist.

Leaders continue to remain leaders and the underdogs tend to continue to under perform.

Never get discouraged at the amount of noise in the market. Classic technical analysis eliminates noise examine the trend and within the trend the individual swing. Then notice they become pretty predictable. Gaps in Trading Gaps First, lets deal with gaps, or windows as they are called by Japanese candlestick chartists. Gaps are spaces in the price chart where no trading has taken place the price has just jumped from one number to another. Almost invariably, you will see them between two adjacent days. The second day opens at a price that was not traded on the previous day, and continues from there. For it to be a gap, there must be a price range which has not been traded between the two days. Heres an example of a gap : -

In this case, the gap occurred in January 2011, and as you can see was accompanied by a high volume (shown on the lower bar chart). This is typical of this type of gap. Possibly there was some company news which caused this gap open, and you can see from the length of the candle and the absence of a wick on either end that on this day prices rose strongly from start to finish. If youve been looking at trading, you may have heard the expression that gaps are always filled, meaning that the price will always come back at some stage to trade in the range of the gap. That is not true, and depends on the type of gap that you are looking at. Some types of gap will usually get filled, and others wont. The three types of gap are the breakaway gap, the runaway gap, and the exhaustion gap, and well look at each in turn. Firstly, the breakaway gap. This type of gap you will see when there is a strong breakout from an existing price pattern. Its basically a sign of strength, and you will usually see greatly increased volume. You might see this when you have been identifying a reversal pattern, and waiting for it to resolve. This is the type of gap shown above. You shouldnt hold your breath waiting for this gap to be filled, as its

unlikely to happen any time soon, particularly in the case above with the high volume of trading. In fact, if the gap is filled its a sign that the breakout has failed. However, if the price does come back down to the gap it quite often forms a support (or resistance if in a down-trend). You can see exactly that in the chart above, where the price is heavily supported just below 240 for several weeks in March before going back up again. The second type of gap is called a measuring gap or a runaway gap, and it is a good sign that you will see in a strong trend. It often happens around the middle of the move, which is why some analysts call it a measuring gap, estimating that the price has gone about half of its total ultimate distance. It shows a good flow in the trend, and again probably will not be filled by any imminent price action. It might also act as a support or resistance, because if filled it would be a sign of weakness in the trend. Incidentally, you can sometimes see a series of these in a trend, so its not necessarily half way; but that would show a very strong trend. The third type of gap is the one that is likely to be filled. Its called the exhaustion gap, and it happens when the trend is running out of steam. Sometimes at the end of a trend there will be a desperate leap forward by the price, creating a gap, but it is likely that the price will fall back to it soon. When the price drops below the gap, its usually a sign of a reversal. You can also see the first and last types of gap together, and this has a special name of an island reversal pattern. First you would see an exhaustion gap at the end of a strong trend, commonly followed by the price trading sideways. Then a reversal gap starts a trend in the opposite direction, leaving the sideways price action as an island with the gap on each side. Trading gaps with the most potential By Chris Kacher & Gil Morales When investors see a stock gapping to new high ground on huge volume they immediately think, Well, I cant buy that now the train has left the station. However, up-gaps that occur on massive volume can be some of the most potentially profitable price-volume signals you will come across. When a stock gaps higher and exhibits certain characteris-tics the train is, in fact, often just leaving the station. Although the crowd is afraid of buying up-gaps because the sudden jump gives the stock the illusion of being too high, massive-volume up-gaps are exactly the type of rocket-fueled move that signals big money is moving into a stock particularly if it occurs in the earlier stages of a leading stocks larger potential price move. In essence, massive-volume up-gaps work because the crowd doesnt believe them. Two simple rules, based on volume and volatility when an up-gap occurs, help identify the trade setups with the most potential.

Identifying viable gaps

You can use some simple rules to screen for tradable up-gaps. First, the up-gap must be at least 75 percent (0.75) of the stocks 40-day Average True Range (ATR). Figure 1 shows Apples (AAPL) 40-day ATR at the time of its big earnings-related upgap on Oct. 14, 2004, was 0.51; 75 percent of this ATR is 0.75*0.51 = .3825. The stock more than exceeded this number when it gapped up 1.605 on open of that day.

Another prerequisite for a valid up-gap is strong volume, which in this case is defined as volume that is at least 1.5 times the 50-day average daily volume. On Oct. 14, around 98.9 million shares traded on the up-gap day nearly seven times the 50-day average volume of 14.14 million shares on the previous day. (Note how AAPL also made another buyable up-gap as the stock made its big rally into the end of 2004.)

When most investors watch one of their favorite stocks gap higher on a favorable earnings announcement, they usually assume the stock has simply rallied too far to buy. However, buying a stock aggressively prior to an earnings announcement with the intention of participating in a possible up is simply spinning the roulette wheel. The true high-probability buy point occurs when the up-gap takes place, because price and volume parameters can be determined and well-defined risk management boundaries established. In AAPL, the October 2004 major up-gap was the starting point for a long-term price move that has continued to this day, as AAPL remains at or near all-time highs, some 27 times higher today than the price it hit on Oct. 14, 2004. Although gap size and volume are key factors in determining whether a gap is tradable, there are other qualitative factors to consider in the stocks chart pattern. For example, confirm from a quick check of the price chart that the stock is an uptrend or coming out of a roughly sideways price consolidation several days or weeks long. up-gaps that occur in downtrends are typically not high-probability buy points because they are often temporary, news-related countertrend moves that eventually give way to the stocks overall macro trend. In general, the up-gap should occur in a constructive, fundamentally sound, leading stock. 5. What Causes gaps? Gaps can be caused by obvious reasons like news (a good earnings report or positive clinical trial results) or they can occur for less obvious non-fundamental reasons (such as trading dynamics), but either way the nimble trader can take advantage of them to profit. According to TA theorists the underlying reason for gaps is "irrational exuberance" that will eventually fade (and thus fill the gap).

6.

Identifying Gaps According to TA gurus, identifying real gaps is by far the most difficult part of the whole process of trading gaps, and there are literally hundreds of theories and approaches to identifying particular types of gaps. For introductory purposes, there are four basic types of gaps.

7.

The Four Basic Types of Gaps Breakaway gaps are gaps occurring at the end of a price pattern and signal the beginning of a new trend. Exhaustion gaps occur near the end of a price pattern and signal a last attempt to reach new highs or lows. Common gaps are gaps that do not fit in a price pattern--they simply represent an area where the price has moved without a specific

explanation. Continuation gaps occur in the middle of a price pattern and signal a large group of buyers or sellers who share a belief in a stock's immediate future direction.

8.

Strategies for Trading Gaps There are numerous basic as well as extremely complex strategies surrounding trading gaps, but all involve the idea of a stock price that is trending upward eventually losing momentum and dropping back down to fill the gap or vice versa.The central idea is that when the price has "filled the gap," then it is at a bottom and going to rise again from there or is at a top and is going to fall from there, so when the price of a stock fills a gap it is an ideal time to buy or sell shares (depending on whether it was a "gap up" or a "gap down").

9.

Trading Gaps The two most common strategies are "fading the gap" and "anticipating the gap." Fading the gap is trading in the opposite direction once a high or low point has been determined (using TA). For example, if a stock has run up on rumors of a buyout, and a trader identifies the price pattern as an exhaustion gap, then she might short the stock, anticipating the gap will be filled to the downside. Anticipating the gap is buying a stock when fundamental or technical factors suggest a gap is likely (buying a stock after hours when it releases a good earnings report after the close anticipating a gap up the next day, for example), and then selling the position when the gap is filled.

Break Studios Contributing Writer

If you are an active trader, learning how to trade the gaps in the stock market can be a profitable endeavor. A gap occurs when a stock closes at one price and opens at a price that is either higher or lower than the previous close. These gaps in the stock market can happen after the end of the trading day or even minute-to-minute. In order to try and make a profit, you must first be aware of the risks associated with gap trading. 1. Before you trade you should always try to find out what caused the gap. For example, a company may make an earnings announcement after the closing bell signals the end of trading for the day. If the earnings are much different than what the market was expecting, a price gap may occur when trading begins the following day. Gaps in the stock market can also happen at any time during the trading day. If a sudden event in the world causes some big investors to panic, a gap will often occur. Try to find out the reason for the sudden price change before trading a gap intra-day. 2. Once you decide to trade the gaps in the stock market, you will have to determine your course of action. Many traders will buy the stock as soon as trading begins for the day, depending on the reason they determine that the gap occurred. Other traders will wait for the gap to fill before entering a trade. Filling the gap is nothing more than having the stocks price return to where it was when the gap occurred. For example, if a stock was trading at 25 and then gapped to 30, to fill the gap it would have to return to 25. If it does, the gap is considered filled. 3. There are traders who will try to profit by trading the stock as it returns to the price of the gap. For example, if a stock was trading at 25 and gapped lower to 20, the trader would buy the stock at the lower price to try and profit if the price returns to fill the gap at 25. 4. Gaps do not always get filled. This is the biggest problem when trying to trade the gaps in the stock market. Sometimes a gap is the beginning of an extended price move that lasts for years. The gap was never filled because the price kept moving in the same direction. This can be either up or down, it does not matter. 5. Sometimes an economic or other unforeseen event causes a sweeping move across the entire stock market. This can result in multiple stocks with gaps on their charts. You can check several of the stocks you closely follow to see if a price gap occurred on one of the stocks charts. If you find one with a gap, decide the best way to profit from it before you enter the trade.

 Hello, fellow investors! Last time we introduced a stock trading strategy based on continuation gaps. Now, we will talk about another gap trading strategy that uses the exhaustion (novice) gaps. If you dont know what a novice gap is, please refer to the first article from this series. Okay, lets talk about our plan: we will be looking for a multi-day one-directional trend. We are talking about at least 5 daily candles in the same direction. Next, we will wait for two entry confirmations: A novice gap that gaps far away from or into EMA 8 and 21. A counter-trend candle. Note that we will trade AGAINST the trend; this is an advanced stock trading strategy that requires greater understanding of the market and the stock in question. Thats why we recommend testing this tactic with a demo account. So, lets take a look at the example above. We have a multi-day down trend made of seven black candles so far so good. Next, we notice a gap that leaps far away from EMA 8 and 21. Okay, this is our first trade signal. Finally, you can see that the new candle is a counter-trend one. This is enough to open a buy position with a stop-loss below the white candle. Thats all for now, I hope you found this article helpful enough to reconsider putting novice gaps in your stock trading arsenal. This is the end of the gaps series, but we will bring many more soon. In the meantime we will be bringing comprehensive reviews and rankings of the best online Stock trading brokers, Stock trading software and robots shortly.

 Hello, fellow investors! Today we will kick off a new series of articles, where we will focus on the price gaps: what are price gaps; how to interpret and successfully trade them? Yes, there are trading strategies based on price gaps and they are quite profitable. However, note that trading gaps requires advanced knowledge and understanding of the market; this technique is not recommended for beginner traders! It is very easy to see the gaps, but it is very difficult to understand and use them in your favor! If you decide to put this strategy in your trading arsenal, we recommend spending some time learning and observing the gaps behavior before you step in and open orders. What is a GAP? A gap occurs when the opening price of a given stock is different than its prior day`s closing price. The area between the opening price and the prior day`s close is the gap which is typically measured in price and/or percentage. Gaps are an important part of the stock trading. Its something you definitely have to understand, because they can change the course of a stocks price. Sometimes the gaps can signal a continuation of the trend or a reversal and you know that the smart traders always trade in the direction of the trend. Major gaps There are only two types of gaps: Gap UP yesterday`s close is lower or below than the opening price. Gap down yesterday`s close is higher or above than the opening price. What causes gaps in the price chart? A gap is typically caused by various economic indicators, news, company`s reports and everything else that affects the stocks price, the sector or the marker as a

whole. For example, a gap can occur in cases like CEO changes, bad finance reports, personal reduction, etc. Now, lets dig deeper and talk about the types of gaps: Continuation gap

These gaps occur during and in the direction of an ongoing trend. They act as a confirmation that the trend is strong and will most likely grow stronger. The continuation gap typically brings in above average volume. Professional (reversal) gap

These gaps occur as a reversal against the short-term trend and most often cause significant shock value in traders. The professional gaps can be so powerful that they may actually trick buyers and/or sellers into extreme emotions and in the end, reverse the stocks short-to-intermediate term trend. Typically bring in high volume. Novice (exhaustion) gap

These gaps occur after and in the direction of a strong, one-directional multi-day move, typically ending the short-term trend. In a perfect situation, the novice gaps are gapping far away from or into the 21 EMA and/or into an area of price support or resistance. These gaps typically bring in high volume. Breakaway gap

These gaps occur in a consolidated market state, especially when the price is clearly shaping up a known trade pattern: triangle, flag, etc. The breakaway gap breaks the resistance or the support levels and this clearly confirms the start of a trend. These gaps are also very useful in a consolidated state, where we dont see a pattern, but we have a very strong. The breakaway gap brings in an exceptionally high volume. Thats all for now, I hope you found this article helpful enough to reconsider putting gaps in your stock trading arsenal. If you enjoy this article, stay tuned for the next in this series. In the meantime we will be bringing comprehensive reviews and rankings of the best online Stock trading brokers, Stock trading software and robots shortly.