What are the top lessons to learn from gap trading?

1 Types of gaps

There are four main types of gaps that technical analysts recognize: common, breakaway, runaway, and exhaustion. Common gaps are usually insignificant and occur within a trading range or a sideways market. They do not indicate any major change in the market sentiment or direction. Breakaway gaps are more important and occur when the price breaks out of a consolidation pattern or a significant support or resistance level. They signal the start of a new trend or a major shift in the market dynamics. Runaway gaps are also known as measuring or continuation gaps, and they occur in the direction of an existing trend. They indicate that the trend is gaining strength and momentum, and that there is more room for the price to move further. Exhaustion gaps are the opposite of runaway gaps, and they occur near the end of a trend. They indicate that the trend is losing steam and that a reversal is imminent.

2 Trading with gaps

One of the key lessons to learn from gap trading is how to use gaps as entry and exit signals for your trades. Depending on the type of gap and the market conditions, you can adopt different strategies to capitalize on the gap opportunities. For example, if you see a breakaway gap in an uptrend, you can buy the asset as soon as the gap is confirmed, and place a stop-loss below the gap. Alternatively, you can wait for the price to retest the gap area, which often acts as a support or resistance level, and buy on the bounce. Similarly, if you see an exhaustion gap in a downtrend, you can sell the asset as soon as the gap is confirmed, and place a stop-loss above the gap. Or, you can wait for the price to fill the gap, which means that it returns to the pre-gap level, and sell on the rejection.