What are the most effective gap trading strategies for intraday trading?
Gap trading is a popular and profitable intraday trading strategy that exploits the price differences between the opening and closing prices of different trading sessions. Gaps occur when there is a significant change in supply and demand, often driven by news, earnings, or other events. In this article, you will learn about the most effective gap trading strategies for intraday trading and how to apply them in different market conditions.
There are four main types of gaps that intraday traders can encounter: common, breakaway, runaway, and exhaustion. Common gaps are usually small and insignificant, and they tend to fill quickly. Breakaway gaps occur when the price breaks out of a consolidation or a trading range, signaling a new trend or a reversal. Runaway gaps are also known as continuation gaps, and they indicate a strong momentum in the direction of the prevailing trend. Exhaustion gaps are the opposite of runaway gaps, and they occur near the end of a trend, signaling a potential reversal or a pause.
The gap and go strategy is one of the most effective gap trading strategies for intraday trading, especially for breakaway and runaway gaps. The idea is to enter a trade in the direction of the gap as soon as the market opens, and exit when the price reaches a target or a stop loss. To identify a valid gap and go setup, you need to look for the following criteria: the gap should be larger than the average range of the previous sessions, the volume should be high, and the gap should not fill within the first 15 minutes of trading. You can use technical indicators, such as moving averages, trend lines, or support and resistance levels, to determine your entry and exit points.
The gap and reverse strategy is another effective gap trading strategy for intraday trading, especially for common and exhaustion gaps. The idea is to enter a trade in the opposite direction of the gap, anticipating that the price will fill the gap or reverse the trend. To identify a valid gap and reverse setup, you need to look for the following criteria: the gap should be smaller than the average range of the previous sessions, the volume should be low, and the gap should fill within the first hour of trading. You can use technical indicators, such as oscillators, candlestick patterns, or Fibonacci retracements, to determine your entry and exit points.
The gap and run strategy is a variation of the gap and go strategy, but it involves holding the trade for a longer period of time, usually until the end of the day or the next session. The idea is to capture a larger price movement that follows a significant gap, such as a breakaway or a runaway gap. To identify a valid gap and run setup, you need to look for the following criteria: the gap should be larger than the average range of the previous sessions, the volume should be high, and the gap should not fill within the first hour of trading. You can also use technical indicators, such as Bollinger bands, MACD, or RSI, to confirm the trend strength and direction.
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For a gap and run strategy to be profitable for TAs when it occured in the market, it is important for the hawks anticipating it have the right tool to take advantage. At the premarket, when stocks with volume are found, the most common strategy is to bring premarket scanner into use to take advantage.
The gap and snap strategy is a variation of the gap and reverse strategy, but it involves entering a trade after the gap has been filled, rather than before. The idea is to take advantage of a snapback or a bounce that occurs after a gap fill, such as a common or an exhaustion gap. To identify a valid gap and snap setup, you need to look for the following criteria: the gap should be smaller than the average range of the previous sessions, the volume should be low, and the gap should fill within the first hour of trading. You can also use technical indicators, such as stochastic, CCI, or ADX, to identify oversold or overbought conditions and potential reversal signals.
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This is not a common trading strategy actually. The variation coincides with other form of trading protocols of engagement. Such "gap and filled" zone is be acting as "support turned resistance" to some TAs. While others might be seeing it equally as mitigation block or breaker block as the case may be. It is really technical to some point if one is not familiar with different market gaps.
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