Gap Trading Strategy

Best Intraday gap trading strategies

Gap Trading Strategy

Gap trading primarily points out trading in stocks that have a price gap from the previous close to the opening price of the next day and can be executed without difficulty in online trading. Rising above a certain range specifies a buy and falling below it indicates a short.

When a chart pattern is viewed, there are four types of gap patterns recognized

Common Gap:

The variation in the price of the stocks that can even be the outcome of a stock being confirmed ex-dividend when the trading volume is low. These gaps arise very frequently and get filled just as quickly as they happen.Getting filled points out that the price goes back to the level before which the gap happened; also known as closing the gap and therefore common gap does not offera lot of trading opportunities.

Breakaway Gap:

Before we recognize the Breakaway Gap, we must know the model of a congestion area which is the price range in which the market has traded for certain phase of time. When the price is breaking out of this congestion area, it creates the occurrence known as a breakaway gap.

Runaway Gap:

Runaway gaps are known as measuring gaps also. These are a result of increased interest in stocks. It generally indicates traders who did not come in on the action when the price of a stock moved up and instead of waiting for the price to drop again, choose that this is not going to occur and start buying the stock in large quantity so that the price gaps above the previous day’s close.

Exhaustion Gap:

Gaps that arise near the end of a good uptrend or downtrend that are selected by the high volume traded and evident price difference between the previous day’s close and next day’s opening. They are only noticeable from Runaway Gaps in terms of the volume traded.

What is a Gap filling?

A Gap has been filled means that the price has moved back to the level before the gap arises.

Filling of a Gap can be caused due to:

a) Price patterns

b) Technical resistance

c) Irrational exuberance

This trading strategy must be applied with carefulness. Technical or fundamental factors that affect the BSE and NSE can lead to the occurrence of a gap. These strategies need to be applied to trade with adequate research to earn profit.