Gaps are nothing but Price of a Stock moving up and down sharply with no or little trading happening between the previous days close and current days open. Gaps show an ultimate picture of imbalance between supply & demand. Gap formations are due to many fundamental and technical reasons.
Most common example, when there is an announcement of company earnings. Gap Up or Gap Down is imminent the next trading day due to positive or negative news. A trader can profit from gaps provided he/she can identify the type of gap and its location with perspective to Institutional Supply & Demand Zones.
Gap Trading Strategy using Supply and Demand Zones
A lot of traders are fearful of Gaps and see it as a threat & aren’t comfortable carrying positions overnight. However, for a professional Supply Demand Trader, these Gaps aren’t threats on the contrary they provide high probability trading opportunities, when combined with Supply & Demand Zones.
Inside gaps are created when Price Opens between the prior Day’s High and low. Often these gaps fill quickly on the same day. Inside gaps can be mainly used for quick intraday trades, provided they happen at strong supply & demand zones.
Gap Up into a strong Supply Zone provides a good short opportunity, whereas Gap Down into a strong Demand Zone presents a good long opportunity. Let’s see an example:
2.How to Identify & Trade Outside Gaps?
Outside gaps are created when Price opens beyond the Prior days High and low. These gaps generally do not fill on the same day. They indicate the establishment of a new Trend or the continuation of the existing one.
One must wait for quality Supply & Demand Zones to form after the gap and wait for a pullback to join the new move. Let’s see an example:
3.How to Identify & Trade Novice Gaps?
When price gaps in the same direction of the current trend, then it is called a Novice Gap. Novice gaps as the name suggests are created by novice trader emotions and are excellent opportunities to find high probability trade setups.
Gap Up or Gap Down after extended moves into quality areas of Supply & Demand, offer us high probability Short & Long opportunities respectively. Let’s see an example:
4.How to Identify & Trade Professional Gaps?
When price gaps up in the Opposite direction of the current trend, it is called a Professional Gap or a Pro gap. Pro gaps represent a significant imbalance between Supply & Demand.
Pro Gaps generally occur after extended moves in one direction, taking the amateur traders completely by surprise. They generally bring about trend change. Pro Gap Down & Pro Gap Up form high probability Supply & Demand Zones. Pull back to these zones provide us with opportunities to enter at trend change points. Let us see with an example:
Excellent article. Thanks. One question though: it is usually seen that if there is a gap down in long term uptrend, then people immediately buy this dip and market moves up. Similarly, if there is a gap up in long term down trend, people immediately sell the rise and market moves down. What kind of gap would you call this? I know the gap up or gap down could be inside or outside, but many times for the morning trade people form the views about buy on dips or sell on rise depending on prior trend and gap up/down during pre-market. So how would you suggest to trade such gaps?
sabyjpinto
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@vaibhavshah24, its still an inside gap, right..? buy/sell on PDH/PDL break.
traderPz101
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I have already this information but I can say that this much of information is too valuable for new traders
Thank you for your valuable contribution to the Tradingview community and keep up the good work!