One famous and effective way to trade the market is to use gap trading strategies. However, as it grows ever more popular across traders of all sorts e.g stocks, forex, futures, etc. one has to find an edge whilst using this strategy in order to win the market.
This video will give you insights on how to use a gap trading strategy that will definitely help you tremendously in trading the market.
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Hey my friend, thank you for watching this video on gap trading for daily profit. This is Barry Burns with Top Dog Trading and let’s jump right into it. So gap trading is one of those classic techniques that everybody learns normally right at the beginning of their trading career, and it’s a very popular way of trading. It’s very appealing in the sense that it looks easy at first glance and it also was one of those things that don’t work as well as it used to, but that’s not surprising because it is so popular. Anytime anything becomes popular, guess what? That’s right about the time it stops working. Everybody knows about it, everybody starts trading it. And guess what? Most people lose money. So once everyone starts doing something, it stops working. You’ve got to have an edge.
By that I mean you can’t be doing the same thing everyone else does. So here’s the classic pattern that people are always looking for. We’ve got one day here, by the way, these are California Times down here and this is a three-minute stock chart. So you’ve got your open way down here and the previous day closed way up there, and the easy way for gap trading is to just say I’m going to trade it back into the close of the previous day. And Japanese candlestick patterns, by the way, they also traded gaps and they call it closing the window. So it’s really nothing new to the Western world. The Japanese were way ahead of us. They said, okay, windows open and now it’s going to close.
Gap Trading Strategies
That’s great. That’s fun when it happens, but it’s not the way it normally happens anymore. Obviously, it still does happen sometimes. Here is an example. Now, let me show you what happens most of the time these days in another example. If you were to say we closed here this day and we opened down here this day and I’m just going to trade the gap close right away, you’d be a sad little puppy because it didn’t close right away. In fact, let’s watch this whole day. See how and when it closes. All right, so you think, okay, I’ll just trade it later in the day. There’s the end of the day and it still didn’t reach the gap close. There’s the line right there. So one of the questions when it comes to technically how to trade this is where do we put the line?
Gap Trading Techniques
So in looking for the gap to close, technically you would say we should do it on the previous day’s close because that is literally closing the gap; closed at one price one day and then it opens at another price other day, and you’re waiting for it to close or get back to the close of the previous day. That’s not the best way to do it. The best way to do it, in my opinion, is to look for the little low there and that’s just a more conservative way to trade it. I’ve seen many times where if you put it at the close or the last bar, it could be a green bar and maybe the close would be up there. And the markets are not perfectly neat because you’ve got millions of people all over the globe trading in 10 different things, time frames, etc.
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So don’t expect to get to the exact penny, pip, pixel on your chart that you wanted to get to. Allow for that messiness to be conservative and place it at the lowest low there. Wait for it to come back into that level. Okay, so now that we have established that technique, here’s the other thing that I want to share with you. After the market gaps, quite often what happens is it goes sideways for most of the day. In fact, here’s what would happen, there you go, big move down with our nice gap. And it goes all the way down and, actually, it goes all the way down there in the first three minutes. So from there to there in the first three minutes, what happens the rest of the day? Not a whole lot of anything. It just kinda goes sideways.
That is what normally happens. Now that is the norm. That is what you will see more days than not. And remember trading is about trading probabilities and we never know what’s going to happen. There are no certainties. So we’re trading probabilities and this is the probability scenario and part of the reason logically is because after the market has a big move down, and remember this is not showing any pre or post market data because if you show pre and post-market data, you won’t see the gap. There’s been trading that’s going on overnight there or early in the morning before New York opens and now. So what’s happened is a bunch of people shorted and when the market opens open outcry and most people are looking at their charts, they’re saying I don’t know, I’ve already missed out on that big of a move.
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So whatever I want to do, I want to go short now. I mean the dominant direction is down, but I already missed out on all that. So psychologically the masters are saying I’m getting in too late. On the other hand, the sentiment is bearish. So some people are thinking gap and go, some are going to by thinking that the gap is going to close and you’ve got this conflict. So you’ve got people on both sides in the bottom result, is that after gaps quite typically on a daily or an intraday chart, the market really just doesn’t go anywhere. It just kind of goes flat for the rest of the day. It’s not a great trading market for the rest of the day. So here we go and it’s several days down the pike here about three days later and we get another gap.
So from there to there, do we get a gap close if you’re going to trade the gap close and maybe even wait for the peak there to come back down? Nope, sorry. You are not going to get it. The whole day goes by and the gap does not close. So what does happen? Well, just what I said gaps up and now you’ve got conflicting views in, therefore, the market goes sideways for most of the day. It finally does go up. But again it goes up in the afternoon. So if you are going to look for a market move after a gap, usually it’s going to be after lunch. And that’s exactly what this is. This is 1:00, New York time, 10:00, California time. And where does it go? It goes back to this blue line. What’s that Blue Line?
Stock Gap Trading Strategies That Work
Well that Blue Line, if we scroll back, that’s where this gap started. So the gap does close eventually. It took three days for that gap to close. Therefore what I recommend is that you do put these levels on your chart and make them something unique, like a different color. Whatever color you want to mean something to you, but just that you don’t use for anything else. So you might use something that stands out. You’re not going to use it for other support resistance levels. So let’s say you want to use Golden Rod. Okay. And we’re going to make it a little thicker so it really stands out and that whenever I see that line with that thickness, I know, oh wait, that’s where a gap close would occur.
And it is acting almost like a magnet really that yes, the markets are very aware of gaps. The masses are aware of gaps, no question about it. And for that reason, they do tend to have a self-fulfilling prophecy. So I put it on there, but I don’t expect this necessarily going to feel in the first day or even two. In fact, let’s look further. Let’s take that puppy off of there and let’s look at some further examples here. We get another gap here. That’s open and that doesn’t close. There’s your gap from the previous day. Okay, so that one doesn’t close and we do not close that day. Let me just put a line on there. Again, make this clear for you. So there I would put it there. See now this day we closed here, but I wouldn’t put my line there.
Gap Trading Techniques
I’m going to put it down here just to be conservative. Then now look what happens, this is cool. Let me get this all on one chart so you can see. We gapped down this day. We don’t feel that gap that day. Again, notice how the market kind of just goes sideways for most of the day. Then the next day they get fills, but you don’t really have a chance to take the trade for the gap fill because it gapped up into the gap, fill gaps down, and then it gets back up into the gap fill type. Well Great. No opportunity to take that trade unless you are trading overnight. Again, can we get the same dynamic here that I was talking about? A pretty good gap up. Okay. Goes Up. And then what’s it do for the rest of the day? Just kinda goes sideways.
Sorry. Not really anything. Say you need to do. If you didn’t want to do something, it’d be in the afternoon. Take that a little move there. So now this level, it’s not only a gap close, but it is a support level. The market bounces off of it, comes back again as support and bounces back off of it. All right, goes back on up and let’s see. There we go. Get another one. Good fact. We’ve got two more. So let’s look at these real quick. Got a gap up. the market doesn’t really go up much. From there it goes kind of sideways, does not fill the gap next day. Gaps up, it’s a gap and goes up. But again, what most of the day after reaches a tie. It’s just going sideways. The afternoon. You get your movement where it breaks out.
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