A gap in the market (trade gap) is an empty space that remains in the price of an asset when the movement is so fast that the continuity between the candles is lost. There are different reasons why a price gap occurs and you can learn to understand and take advantage of them.
Gaps occur when the closing price is at one point and the opening price is at another. Because the market moves by supply and demand, these imbalances are what cause the price to go looking for more counterpart elsewhere, and therefore the price moves.
Disclaimer: the information provided in this article shouldn’t be considered investment advice. The post has been created for educational purposes only. We are not financial advisors.
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Gaps trading strategies
Spark Gaps
These gaps are called “spark” because they simulate the spark of an explosion analogically, thus initiating a new trend (generally with high volume). This pattern offers excellent profit opportunities for gap traders.
It is necessary to point out that when the market is lateralized (the price fluctuates in a range without breaking supports/resistances) and a gap appears, the probability that the market starts a new trend increases, which could give us an opportunity for early entry and take advantage of quite a price tour.
In order to manipulate the gaps, we must ensure that the market has a decent market volume. Thus, we can ensure that the price will fluctuate enough to reach our target.
Once the gap is seen, all you have to do is enter as soon as possible in the direction of the gap. As a general rule, a good point to place the stop loss is the last price before the gap.
The spark gap can be identified if the candles that come from the gap continue to set higher highs, in the case of an uptrend. For downtrends, candles should mark lower lows after the gap, thus denoting an obvious opportunity to issue a short order.
Speed gaps
Speed gaps arise when too many long/short orders enter, so the market jumps prices and creates the gap. This price lag marks the development of the most aggressive point of a trend, so you can make a good decision on where to place your take profit and your stop loss.
We can easily recognize these gaps because instead of starting a new trend, they appear once they are already in progress and all orders are aggressively accumulated in the market. For this reason, we will frequently see a volume peak when the gap opens and although it will not have the same level as a spark gap, it will register sudden movements.
In normal cases, speed gaps take place right in the middle of a trend, which can also help us when determining when this trend will end- It is recommended to set Stop Loss at the final price before the gap appears.
Final sprint gaps
These gaps are so named for similar the last activity point in a trend. Basically, the trend is accelerated before finishing, so it opens a gap in the market. After the gap, the trend is dying and stops completely to start an aggressive trend turn.
So, our entry will be located at a point of counter-trend, placing the stop loss close to the highest (or lowest) price reached of the trend that has already died.
When the trend turns, we can see higher maximums or lower minimums (depending on the direction of the trend), so we can stay in operation and collect profits as the route has volume.
