Gaps indicate overnight price dislocations, which is when a security jolts higher or lower than the closing print. They come in many varieties, often signifying an environmental shift that predicts subsequent trend waves. Many traders lack effective strategies to manage gaps, whether they pop up on open positions or mark the first play of the day.
Let's address this flaw by organizing short-term gap mechanics into simple markers that turn these confusing phenomena into reliable profit makers.
For related reading, see: For more information, read: The first step requires no effort - just sit on your hands and allow price action to establish the first trading range of the session. See Expert Trader Strategies: The Opening Price Principle. This process could take a few minutes or a few hours.
Mark out the high and low of the new trading range. The side with lowest price after an up gap or highest price after a down gap becomes the r everse break line , marking support or resistance that will ring a bell to act if price returns to test it. Support And Resistance Basics. The trend initiated by the gap confirms when price breaks the first trading range in the same direction. Intraday trend following positions can be established using this signal because it raises odds for additional gains.
In addition, odds for a gap fill in that session lower significantly when it holds unscathed through the first hour, allowing multiday traders to place a stop-loss behind the gap fill line. Short-term traders can apply a different methodology to place their stops after the range break. The Anatomy Of Trading Breakouts.
Then place the stop just behind that price. The reverse break line works best when it aligns closely with the opening print but the deeper line established by early testing can be used as long as the gap remains unfilled.
Expect a counterswing through this line to reach all the way to the gap fill or gap close line. The security is likely to reverse when these levels are hit, forcing a test at the reverse break line from the other direction. Combining Trend-Following and Countertrend Indicators. Testing back at the reverse break line can offer the most significant trading opportunity of the day. Once filled, many trends resume immediately, charging back above the reverse break and through the other side of the opening range.
Given these dynamics, a buy signal goes off when price remounts the line after a gap fill to the downside while a sell signal goes off when price slumps through it after a gap fill to the upside. Meanwhile, a reversal at the line tells us to do nothing until price a surges through it on a subsequent test, or b swings back through the gap fill line, signaling a countertrend trade entry.
For further reading, see Catching A Falling Knife: Picking Intraday Turning Points. Sub-divide price action after an opening gap into three lines of interest. Then watch testing at these inflection points during the trading day because they can set off all sorts of buy and sell signals. Dictionary Term Of The Day. How much a fixed asset is worth at the end of its lease, or at the end of its useful Broker Reviews Find the best broker for your trading or investing needs See Reviews.
Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. Identify Action Lines Mark out the high and low of the new trading range. The Bottom Line Sub-divide price action after an opening gap into three lines of interest. No thanks, I prefer not making money. Get Free Newsletters Newsletters.More...