your #1 site for FREE swing & day trading content
|
|
|
Trading the gap successfully
Nov 3, 2006 - Professionals love fading gaps against inexperienced excited traders who trade based on news... Waking up with the market opening with a gap can be anxious and stressful for some and an opportunity for others. Gaps are a shock to the rhythm of the market due to recent news. The only way to adjust the imbalance is result of a gap. There are many types of gaps and many ways to trade the gaps. Many books and courses discuss this phenomenon extensively, explaining the what, the why, and the how. Technical analytic approach to gap works best because it simplifies the phenomenon to make it easier to understand: identifying support and resistance in these gap structures. In short, simplicity trading is trading with success. Categorizing them can be beneficial if they can answer two logical questions: will the gap fill? And if yes, where is the threshold level to determining that the market is filling the gap? Gaps happen when an imbalance of demand and supply, causing prices to spike one way or the other to meet the satisfaction of other side who are willing to come into the market and take the transaction. These spike areas are pockets of empty volume and this must be remembered because volume drives prices and without volume prices will not move. It’s common that the price areas where high volume are seen, the gap top and bottom areas become areas of support and resistance, meaning if these prices happen to show up again, expect same congestion due to same high volume (same market players entering or exiting the market) from the previous occasion. One special characteristic about gaps is that the buildup was so tremendous force creating this gap, that it requires same or more force to keep it going in the same direction. If not, where no follow-through is in sight (i.e. no volume or no movement of prices away from the gap area), a gap fill may soon occur. This process will play itself out very quickly in a few hours within the open. Whenever the prices break into the gap, very often it will fill it completely. Why? Because the gap has little or no volume so there is only a small number of buyers or sellers who have previous commitments in this area. This make the fill happen very quickly. Unless the market is very strong in the direction of the gap that it somehow goes midway into the gap and reverse or there is a resistance/support area created before the gap took place. In this case, many buyers or sellers have major commitments and it may cause an interruption to the gap fill as shown in the example below. The bar that pierces the gap now looks more likely the gap will be filled. Unfortunately, the resistance in the middle of the gap stood out and stopped the rally dead in its track. It later reversed back to the gap bottom.
One way to watch whether or not the gap will be filled is volume. Lack of commitment after the gap shows the direction might not hold up. Without new players coming to strengthen to push the trend further, the gap will most likely to be filled. The chart below immediately after the big fat red bar (high volume bar in Equivolume chart), volume immediately dried up (note small thin bars). One bar after another, the prices did not pierce the gap bar's low, making the bears nervous and bulls more confident that the gap may fill today. Professionals love fading gaps against inexperienced excited traders who trade based on news. Staying calm and trying to understand price action in charts can help decipher what may happen next. Volume is crucial in determining the gap action: reverse and fill or continue the original direction. Gaps provide one of the most reliable setups with price stop and targets already determined immediately after they are formed, establishing normally a very favorable risk/reward ratio. Discuss this article in the forum. ...thanks
for the trust you've shown in me and my business.
P.S.- One more thing.... how would you like to use some of the top systems I know of, and have them automatically trade your money for you? Yes, that's right, you wouldn't have to do anything! I firmly believe that these systems are some of the best ever offered to the general trading community. Not only are they proven producers, but they also have low risk and low drawdowns. You don't want to miss these! You see... I've been fortunate in my life to have worked with, and become friends with, some of the leading traders and systems developers in the financial world, and many of them have agreed to allow me to make some of their best proprietary systems available to you. Go here to learn more...
Disclaimer: Please note that charts and commentary provided by the moderator are for educational purposes only. Any trades placed upon reliance on the moderator’s charts or information is taken at your own risk for your own account. Past performance is no guarantee of future results. While there is great potential for reward trading stocks, futures and options, there is also substantial risk of loss and you must decide your own suitability to trade. Future trading results can never be guaranteed. This is not an offer to buy or sell stock, futures, options or commodity interests. Most trading systems are based on historical formulas which have worked in the past. However, what has happened before may or may not happen again. You can lose all your money trading stocks, futures, and options and you must decide your own suitability as to whether or not to trade. Only trade with true risk capital you can afford to lose. Only trade markets you can properly afford to trade. Properly funded trading accounts typically perform better than those that are not. Never risk more than 2-3% of your account on any one trade. Always define your risk before entering a trade and place a stop to limit your risk. There are no guarantees or certainties in trading. Trading involves hard work, risk, discipline and the ability to follow rules and trade through any tough periods during a system’s draw downs. If you are looking for a guarantee, trading is probably not for you. Most people lose money trading. One of the reasons is that they lack discipline and are unable to be consistent. A system can help you become consistent. Ironically, worrying about the monetary aspect of trading can contribute to and cause a trader to make trading errors. Therefore, it is important to only trade with true risk capital.
© Copyright 2007 by MrSwing.com |
|
||||||||||||||||||||||||||||||||||||||
|
by Larry Swing & Brian Tran
