How to trade with the Gaps?
When we analyze the price behavior of any asset, sometimes we see gaps in the graphso that, between two Japanese candlesticks, or bars, what we visualize is a gap. This is due to the fact that at the prices at which we observe the gap there has been no trading, that is, there has been no crossing of operations and there has been an asymmetry between supply and demand. Gaps occur in illiquid assets and after news that strongly affects the asset in question.
Habitually many gaps occur at the opening of the stock markets, and they are usually caused by the news that is known when the market is closed and when it is tight they cause a mismatch between the buy and sell orders, which produces a gap in the price. If that news came with the market open, in all likelihood we would have seen a major candle that moves price in one direction or another, but we would not see that lack of price agreement during gaps.
Typically, small gaps appear in normal market situations and without outlier volume, either due to a temporary increase in liquidity or for some other minor reason. In these cases, the gap is usually covered later, trading in the price range in which it was not previously.
There are other types of gaps with different interpretations, escape gaps, continuation gaps and exhaustion gaps.
Types of gaps
rupture gaps: Breakout gaps in trading appear when an asset is range bound or sideways trend and breaks support/resistance to start a long-lasting trend with some strength. At that time the interest in the market is high and the trading volume increases. It is very common for this type of gap to close before the trend starts, which usually leads to the formation of a pullback.
continuation gaps: Continuation gaps in trading appear in the middle of a trend as a consequence of the appearance of some information that strongly affects in the same direction as the trend.
This increases the interest of speculators and investors, causing a strong increase in volume.
depletion gaps: A trading exhaustion gap appears just before a trend ends, when weaker investors and speculators begin to take positions, it is too late for them. Exhaustion gaps are characterized by being wide and having strong volume. When they occur they usually close quickly and that is when we should take positions.
It is extremely difficult to anticipate the formation or appearance of a gap as this requires a strong understanding of graphical and technical analysis and remains an unreliable method, even for experts. Therefore, it is preferable to wait for a gap to form and use it to adapt your speculation strategy by acting directly on the market.
The way in which the price of the cross behaves following the formation of the gap is also interesting since the speed and amplitude of the filling allow to detect indices as to the direction of future movements.
Thanks to gap analysis, you can quickly anticipate the short-term evolution of a trend using graphical data. By speculating on these gaps systematically, you will be able to maximize your chances of making quick and reliable profits.
Why are Gaps created in Trading?
We are aware that the price increases when you intend to proceed with the purchase and the current price is a bit indifferent to us. In this case also, individuals who buy they won’t mind paying a little extra to obtain the same, paralyzing the offer of the moment and looking for individuals who sell worse.
It is possible that the purchase wish appears in the moment that he market is closed. An example would be during the weekends.
The fact that the market is closed it is not synonymous with not being able to make a purchase. You can leave your prefixed buy order so that as soon as the market opens the next day it will be executed.
When the Weekendwithout a doubt orders will accumulate until the market gradually compares the inequality between demand and supply. In this way, all the operations are piled up, letting go abruptly at the first moment that there is a session the day after.
Daily, we will count a similar effect, achieving it in another way. In this case, it happens that an individual with enough capital takes out a monetary amount to get the shares larger than usual.
Therefore, the same thing happens again. During a moment exactone is grouped large amount of demandQuite higher than what the offer itself can deal with. It treats all the demand of the price of the moment and at the same time the one with the highest prices. This happens before the routine act of reading the price that occurred in the most recent closed transaction take a look at the data and show it on the screen itself. In this case, clearly the price creates a gap.
Some extra data on Gaps
- When it comes to a spark gapit is capable of creating a trend by itself.
- During the high levels of a trend, it may be the case that a speed gap. This tends to be present when a trend is midway. This fact can guide us to estimate when the trend will end.
- When the trend increases creating a gap prior to ending, and then stops the trend to turn sharply, we call it final sprint gap. If we notice this movement, the most advisable thing is to operate against the trend, establishing a stop close to the highest value that has been obtained, acting in favor of it after the gap.
- We must be especially careful with the gap liar, which happens more than we would like. It usually appears when trying to manipulate markets narrowly. The gaps produced are a dead end. They do not produce a trend, and we should not try to get rewards from them.