Gap Trading Strategy

Chapter 13

By :TMK TRADING
 Gap Trading Strategy
The "gap" refers to the variance between the
closing and opening prices of two consecutive
candles. This phenomenon occurs when prices
leap between two trading periods, bypassing
specific price levels. Gaps result in vacant spaces
on a price chart, representing areas where no
trading activity has occurred.
Gap Trading Strategy
What causes prices to experience an upward
gap?
Gaps represent a significant disparity between
demand and supply.
In a Gap UP scenario, the gap occurs due to the
assertiveness of buyers. This implies that there are
more buy orders at the opening than the available
supply at the previous day's closing price.
Gap DOWN is a result of sellers' aggressiveness,
indicating more sell orders at the open than the
willing demand at the prior day's close.
Consequently, gaps typically manifest at price
levels where there exists a supply and demand
imbalance during the opening.
Gaps can also emerge from the overnight
sentiment of participants or significant news
events.
Professional traders often aim to bypass crucial
support and resistance levels. For instance, if they
hold a bullish outlook, they might execute a gap-
up strategy, elevating the price above the supply
zone.
Gaps serve as both support and resistance
levels:
An up gap functions as a support zone, while a down gap
serves as a resistance zone. In the Nifty chart below, the up
gap is observed to act as a supportive barrier for prices.
Gaps serve as both support and resistance
levels:
 GAP Filling :
Gap-fill denotes the retracement of the price to close the
level where the gap originated. The likelihood of closing up
gaps is higher if the preceding day's trend from open to
close was upward. Similarly, the closure rate for down gaps
increases if the prior day's open-to-close movement was
downward.
An up gap serves as a support zone, while a down gap acts
as a resistance zone. Illustrated in the Nifty chart below,
the up gap functions as support for prices.
 Types of Gaps
Breakaway Gap
A breakaway gap signifies the breach of a crucial support,
resistance line, or significant trend line through the
formation of a gap. Typically observed following the
completion of significant patterns such as consolidation
ranges, continuation, or reversal patterns, this gap often
takes time to fill, and it may not occur on the same day.
Notably, the breakaway gap is characterized by high
volume, underscoring its significance.
 Types of Gaps
Runaway Gap
Following an established period of movement, prices may
exhibit a gap referred to as the runaway gap. Within an
uptrend, it signals a continuation of the existing trend,
while in a downtrend, it indicates a sustained continuation
of the trend.
 Types of Gaps
Exhaustion Gap
Weak gap-ups tend to reach resistance, while weak gap-
downs reach support. This price behavior is often
engineered to ensnare traders in a potentially feeble
market and lead them into unfavorable trades. It can
trigger stop-losses for short positions and induce panic
among traders, prompting them to make incorrect
decisions.
 Types of Gaps
Professional Gap
These gaps emerge at the commencement of market
movements, typically within the supply or demand zones.
(Gap up from the demand zone and gap down from the
supply zone) occurs when the price approaches high-
quality supply and demand zones.
 Types of Gaps
Inside Gap
Inside gaps refer to gaps occurring within the range of the
previous day.
1. Week market gap up
2. Strong market gap down
However, low volume serves as a warning sign, indicating a
potential trapped up-move (highlighting a lack of demand
in the market) after a gap-up resistance.