GAP Trading Strategies

In this article, I am going to discuss How to Day Trade with 5 simple GAP Trading Strategies.
Please read our previous article, where we discussed VWAP Trading Strategy in detail. At the end
of this article, you will understand the following pointers in detail.
What are the gaps?
Why the price gap?
5 simple day trading gap strategy
What is Gap Trading Strategy?

Why do prices gap up?

Gaps Greatest imbalance between demand and supply. The gap is up because of aggressiveness
by buyers, I mean there are more buy orders at the open than there is available supply at the
prior day’s closing price. The gap is down because of the aggressiveness of the sellers, I mean
there are more sell orders at the open than willing demand at the prior day’s close. Therefore,
gaps are almost always at price levels where there is a supply and demand imbalance at the
open.
Gaps also occur due to the overnight sentiment of the participant or any big news
Smart money trying to skip important support and resistance level, i.e. If they are bullish they
gap-up price above the supply zone.
GAP act as Support and Resistance
The Up gap act as a support zone and the down gap act as a resistance zone. The chart below of
RELIANCE stock shows the gap up acting

as support for prices.

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The Gap fill
The gap-fill refers to the price retrace and close the level where the origin of the gap occurs. The
closure rate (gap-fill) for up gaps increases if the prior day’s open-to-close price trend was also
up. The closure rate (gap-fill) for down gaps increases if the prior day’s open to close move was
downward.
After the gap price tries to fill the gap. Another occurrence with gaps is that once gaps are filled
by price, the gap tends to reverse direction and continue its way in the direction of the gap (for
example, in the chart BELOW of RELIANCE, back upwards).

Types of Gap Trading Strategy

Gaps are divided based on the context in which they appear.
Breakaway (or Breakout) Gaps
Runaway (or Measuring) Gaps
Exhaustion Gaps
Professional gap
Inside gap
What is the breakaway GAP?
The breakaway gap means breaking the important support or resistance or significant
trend line in the form of the gap. Generally appears after completion of important patterns
like price in consolidation range or any continuation or reversal pattern. Maximum time
this gap does not fill quickly or on the same day. The most important volume should be
high

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Why does the breakaway gap occur?
The smart money knows exactly where these resistance areas are. If the smart money is
bullish, and higher prices are anticipated, the smart money will certainly want a rally. The
problem now is how to avoid the old resistance
 Gapping up through an old area of supply as quickly as possible is an old
and trusted method – a way of avoiding resistance.
We now have a clear sign of strength. Smart money does not want to have to buy the
stock at high prices. They are already bought their main holding at lower levels.
Smart money knows that a breakout above an old trading resistance area will create a
new wave of buying. How?
 Many traders who have shorted the market will now be forced to cover their
poor positions by buying as well.
 Many traders are looking for breakouts will buy.
 All those traders who are not in the market may feel they are missing out
and will be encouraged to start buying.
Here you can see that prices have been quickly up moved by smart money, whose opinion
of the market at that moment is bullish. We know this because the volume has increased.
It cannot be a trap-up move, because the high volume is supporting the move
1.
The chart study above shows breakaway gaps through important support and resistance
levels. Every breakaway gap leads to a trend continuation as well.

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Runaway (or Measuring) Gap:
After the move has been underway for a while, somewhere around the middle of the move,
prices will gap, this gap is called the runaway gap. In an uptrend, it’s a sign of continuation
of a trend; in a downtrend, a sign of continuation of the trend.

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Exhaustion Gap:
You will find that weak gap-ups are always Gap up to resistance or gap down to
support. This price action is usually designed to trap you into a potentially weak
market and into a poor trade, catching stop-losses on the short side, and generally
panicking traders to do the wrong thing.
Near the end of an uptrend, the exhaustion gap occurred. However, that upward gap
quickly fades and prices turn lower. When prices close under that last gap (exhaustion
gap), it is usually a dead giveaway that the exhaustion gap has made its appearance. An
exhaustion gap occurs with extremely high volume.

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Professional GAP Trading Strategy:
These gaps appear at the beginning of the moves. Generally occur at the supply or
demand zone. (Gap up from demand zone and gap down from supply zone) when price
approaches the quality supply and demand zone

.
Inside GAP Trading Strategy
Inside gaps are gaps happening inside the prior day’s range.
1. Week market gap up
2. Strong market gap down
However, low volume warns you of a trap up-move (which is indicative of a lack of demand
in the market) after a gap up resistance

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Gap Trading Strategy:
There are three factors to monitor to determine whether the gap is real or trapped. The
three factors are volume, opening price, and pullback
Opening Price and Pullback
After a gap up, the pullback to be watched
 Flat pullback (price consolidates high of the day). Strong buy signal
 The weak pullback was unable to close below the previous day’s high. buy
signal
 Strong pullback closes below the previous day’s high. sell signal
If the stock gaps up and then sell off and remains beneath its opening price after the
morning pullback has stabilized, it’s possible that the stock has reached its high of the
day. however, if a stock gaps up and pulls back during the morning pullback, but then
rallies to break above its opening price, the mark-up was probably not trapped gap and
the stock should make new intraday highs
Volume
 It is important to watch the volume carefully when determining if a gap is
valid. If the stock gap up high and the volume is also high and also the price
remains above its opening price after the early morning pullback, it is an
excellent sign that the stock has further to go on the upside. All reverse for
a trap gap up
 If high volume appears after a gap up and the stock immediately comes
under selling pressure, chances are that this volume was a seller
 If a large volume of paper in a gap up the situation and if the stock runs
higher, then chances are that it was a buyer, probably the reason for the
gap up in the first place. The smart money will support the stock if he has
the buyer, or he will sell stock in a hurry if he has the sellers. Smart money
does not generally chase the stock in the direction of the gap in the early
morning unless there is a fundamental reason for doing so
Our entry is based on two types of gap
1. Outside gap(market open outside of the previous day range)
2. Inside gap(market open inside of the previous day range)
Outside gap
1. Gap and GO Trading Strategy
All gaps are not filled in that day

Gap and GO Trading Strategy criteria

1. Price gap up above previous day’s high
2. Wait for the first candle to complete
3. Volume should be high and supporting in the direction of the gap
4. Mark opening range
5. Entry on breakout of high of the day
6. Price should above vwap

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2. Gap-fill reversal Trading Strategy
When a market gaps up, then the gap act as a support level for any pullback. Pullback
Tests of gaps on lighter volume tell that the issue does not have enough energy to get
through the gap; instead, the gap becomes support and any bullish signal is triggered by
our buy entry
1. Wait for the price gap up
2. Wait for a stock to pull back to its prior day’s close and fill the gap.
Two types of Pullback
1. Price gap up just above the previous day’s high or below the previous day’s
low, and then a strong pin bar formed which fill the gap. volume should be
high on the pin bar
2. Second price gap up and then retrace and fill the gap. it takes more than 2
candles and the volume should be decreasing
3. You then wait to see a sign of strength and enter the position on that move.
4. Price should not close inside the previous day in any five-minute candle

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5. You then place a stop below the low of the candlestick.

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3. Open Gap Reversal Trading Strategy
These patterns generally appear at the top or bottom or any strong supply or demand
zone
The open gap reversal process
1. There needs to be an existing extended uptrend on the chart for at least a
few trading sessions to the supply zone. A gap up in price to quality supply
zone is a VERY high odds shorting opportunity.
2. Or a gap up in price to quality supply zone in the context of a downtrend is
a VERY high odds shorting opportunity.
3. After a gap up the price starts falling and crosses yesterdays. This
generates the sell
4. The Stop-Loss is the low of the same day.
NOTE:-As we are trading against the gap more confirmation is required confirmation either
from price action or volume action

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4 & 5. Inside GAP Trading Strategy
Let’s analyze a downtrend and the previous day was a down day. Today’s price gap is up
but close within the range of the previous day. Our entry opportunity will be
 Gap up short
 Gap up long
A gap up in price, in the context of a downtrend, is a VERY high odds shorting opportunity
if any bearish reversal signal is given. A gap up in price, in the context of a downtrend, is
a lower odds buying opportunity
If the stock gaps up and then sell off and remains beneath its opening price after the
morning pullback has stabilized, it’s possible that the stock has reached its high of the
day. however, if a stock gaps up and pulls back during the morning pullback, but then
rallies to break above its opening price, the mark-up was probably not trapped gap and
the stock should make new intraday highs
In an uptrend, entry opportunities will be
1. Gap down long
2. Gap down short

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Gap up short in a downtrend

Context downtrend

Wait for at least 5 minutes. Or mark the opening range

After the 5 minutes, wait for a reversal price signal to provide you with short-
term confirmation that the mark-up was a trap by smart money and the
short-term trend is pointing downward.
 Then short below of the first candle
 Volume should be below. If the stock has gapped up high; volume should
be high for confirmation of the real gap. However, if the price closes below
the opening price with no large volume, chances are that the mark-up was
a trap by smart money
Let’s analyze the gap down long in an uptrend

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Gap up long in a downtrend
How to know, whether the gap up is real or trapped by smart money
 Market when gap up opening, the volume should be heavy to go higher. if
smart money is active supported by volume
 Wait and see if the market trades above its opening prices after the morning
pullback. It indicates the gap was real
 Then go long
 Or you can enter from a previous day’s low when the price retrace test of
the previous day’s low
Note: – This entry technique is very risky as we are going against the trend and
momentums so double confirmation is required

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It is very useful for this trading strategy if you combine our Pullback Trading Strategy and
the Advance CANDLESTICK Analysis article. I try to explain, How to Day Trade with GAP
Trading Strategies in detail and I hope you enjoy this GAP Trading Strategy article

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