Once the resistance levels have been identified, the next step is the wait for the first bounce after the gap. Once the bounce runs out of steam (losing volume or prices are getting harder to move up), that is the right moment to take a short position. The stop loss is placed just above the high of first bounce.

Figure 4- The short entry immediate following the first bounce after the gap.

There are two possible exit strategies: price action or the gap width measurement. Using price action, when the lower low no longer shows, then the exit should be executed. As for the gap measurement, use the width of the gap and measure it from the bottom of the gap downwards to find the target, as shown on the chart below.

 

Figure 5- The short exit is taken at the measurement target.

The problem with the newcomers is that they expect prices to bounce all the way back to prices before the gap, thinking that it’s cheap so it’s a chance to get in at the bottom. The truth is the gap is just the beginning of the decline, not the end. Also, counter-trend trading is a very exciting and dangerous strategy, which is why it appeals to them. Stay on the right side of the probability and trade with the trend is always worth more money than the excitement the other side of the trade brings.