Capital market products and financial markets are two types of products with high price volatility. With this high price volatility coupled with market uncertainty. Anything can happen in these two markets. This includes the rapid change in the asset price compared to the previous day’s price. This sharp price change is known as a gap.
What is the gap in trading?
Gap is an area on the trading chart that clearly shows the change in an asset’s price between the asset’s closing price and its opening price.
Usually, in the gap area there are few or no transactions, so this pattern is usually called a candlestick gap.
to understand more Let’s look at an example in the following image:
The image above shows the empty space between the red and green candlesticks. This empty space is called space. Gap usually occurs on 2 different trading days.
Gap may arise due to fundamental and technical changes. In fundamental terms, for example, gaps can arise if non-farm payrolls are announced or there is a sudden scandal involving the company. For technical aspects, for example, the strength of a buyer or seller is much stronger than the other.
The gap between the closing price and the opening price above can be used by traders to gain profit. Either by opening long-term or short-term transactions, however, traders need to formulate an appropriate trading strategy. Because trading gaps can show up, down, and even cheat aliases go up first and then go down.
What is gap trading strategy?
Gap trading strategies are strategies made by traders to anticipate the change in price when gaps occur.
in strategy You should know some of the spaces below:
- support and resistance. Gap up (upper gap) will create support. On the other hand, the starting point of the gap down is the resistance and the support is the low price point. Best of the following chart series.
- fill the gapA gap fill is a chart or a series of price changes that are in the support and resistance area after a gap.
Types of trading gaps
1. Intersection gap
A breakaway gap is a gap that occurs when the price of an asset breaks a resistance or support and forms a short-term trade stop. This type of gap usually appears at the end of a particular price pattern. and indicates that a new trend will be created.
Discrimination gaps arise as one party gains more power. (buyer or seller) compared to the other This can continue to happen if the actions of the buyer or seller are tracked by someone else who is not in the market for the relevant asset.
For example, in the gap up A gap occurs when the strength of a bull, known as a buyer, is greater than a bear (seller). The strength of a bull market increases if sellers short on the asset start buying to compensate for their losses. And other traders began to enter the market for fear of missing the rally.
2. The inevitable gap
A runaway gap, also known as a continuation gap, is a price gap that occurs in the middle of a trend. This is due to the rush of sellers or buyers to buy or sell an asset because they are confident where the asset’s price trend will lead.
For example, the price of stock A shows an increase from 4,500 to 4,600, 4,700 and 4,800. By 4,800, the stock suddenly jumped 200 rupiah to 5,000. make a gap This means that the buyer is very confident that the price of Share A will continue to rise. So they are willing to buy at any price.
3. Exhaust gap
as the name says An exhaustion gap is a gap that occurs because the market is “tired” from touching a new high or low. Usually, this pattern occurs at the end of a price trend, followed by a. false breakout and is a signal of a reversal of the pattern.
So you have to be careful when dealing with this single format. Make sure the breakout that happens is a real breakout. Therefore, you will not open a trading position at the wrong time.
4. Common spaces
Common gap is a type of gap that does not occur in a price trendUsually this type of blank can be filled quickly and completed very quickly as well. Also, this pattern occurs frequently and does not indicate anything.
1. The gap is full.
A full gap occurs when today’s open price is higher than yesterday’s high. (gap up) or today’s open price is lower than yesterday’s low (gap down)
2. Some gaps
Some gaps form when today’s open price is higher than yesterday’s close. For example, yesterday’s high was Rp. 5000 per share while closing price was Rp. 4500 per share, so today’s open price is Rp. 4750 per share.
A partial narrowing of the gap occurs when today’s open price is lower than yesterday’s close. For example, yesterday’s low was IDR 4,000 and the closing price was IDR 4,500, so some gap down would occur if the current open was around Rp. 4250.
how to do gap trading strategy
There are several things you should pay attention to when developing a gap trading strategy:
1. Existence of fundamentals
The first is whether there are fundamental factors that cause the price to change. These fundamentals include the release of the company’s quarterly and annual financial reports. Negative and positive news economic conditions in the country and abroad Information about non-farm payrolls, etc.
This is important because when a gap occurs, a trader cannot immediately determine which line is support and resistance. Therefore, it is more or less difficult to determine the type of gap and the direction of the next price movement.
Dosage must be stated carefully. The above fatigue gap is likely to occur if the gap is not accompanied by sufficient trading volume. The fatigue gap becomes a reversal signal.
This is because the quantity gap cannot be immediately identified. Should you open the order book first to help estimate the out-of-stock gap? In addition to the order book You can also use technical indicators that indicate overbought and oversold conditions, such as the Relative Strength Index, Average Directional Index (ADX), or the stochastic oscillator to measure the strength of both rising and falling volumes.
Yes, you have to keep in mind that gaps will definitely occur more often in less liquid and low volume markets. The indirect also means that there is a greater chance of gaps in weekend trading.
3. Behavior of other traders
The uncertainty in market movements caused by gaps makes traders more anxious to make decisions. Especially at a time when the global economy is as unstable as it is today. Gap may arise immediately. But it quickly turned around for fear of the public.
One way to eliminate this risk is to observe the behavior of other traders. especially institutional traders, institutional traders such as hedge fund companies. They tend to make more rational trading decisions and support their operational plans and have a large amount of capital.
On the other hand, retailers are more likely to make illogical decisions. in observing the behavior of In this “bookmaker” you can use a separate trading application with band features or a Bandarmology application.
from the above important Here are some steps you can take when gaps occur:
- If a gap occurs when you are still “out of the market”, make sure what happens is that the gap is full.The goal is to make sure this phenomenon happens and not just pass.
- Wait until the first candle is full.. The goal is that you can identify the type of gap that occurs, the result of the technical indicator used. Possible direction of the next price trend And you have time to analyze why the gap occurs and what other traders are saying about it.
- The first candle must have sufficient trading volume and move in the direction of the gap movement..
- Remember to mark the open price area..
- Open a position when a real breakout occurs.. The existence of a real breakout confirms that the price trend will change with changes in the gap.
The existence of a candlestick gap in the price of an asset is a natural occurrence. However, this phenomenon indirectly indicates that there is uncertainty in the underlying asset market. Therefore, traders must carefully formulate gap trading strategies.