In general, most gap ups and downs typically occur due to a catalyst or support/resistance area where hedge funds are stepping in to control the overall direction of the market. Generally speaking, here are some facts and my thoughts on playing gaps.

• 91.4% Gap Ups/Gap Downs will eventually be filled

• Gaps represent unsettled areas (supply and demand) within the market

• Gaps are formed when a large number of buyers or sellers control the aftermarket and/or premarket (Daily timeframe)

• Due to the one sided and unexpected move, the market wants to determine whether the zone is truly for buyers or sellers

• With no clear level of buyers and sellers, price action can be quick within gaps and they can fill very quickly.

• Gaps sometimes takes days, weeks, months, or years before they fill. In some cases, gaps may only partially fill and not be completed until some time later/if ever.

• Below are two major ways to play Gap Ups and Gap Downs

DAILY CHART EXAMPLE - SQUARE

• Wait for your Opening candle. If you are playing the daily chart, wait one day, if you are playing the 10 minute charts wait 10 minutes.

• Determine your midpoint

  • Gap Ups = (Opening of New Day - Close of Previous Day) and divide by two (2)

  • Gap Downs = (Close of Previous Day - Opening of New Day) and divide by two (2)

  • The midpoint often can serve as resistance

• Wait for Opening Candle

  • Swing Trading (Daily Candles) - Wait one day

  • Intraday Trading - First candle (10MIN, 15MIN, 30MIN, 1HR); prefer 30MIN to 11HR

• Based on Opening Price, determine if it is going up or down

  • Green Candle: Opening is now your key support area. This can be used for pullbacks, but exit below this point.

  • Red candle forms: High is resistance level to watch for rise above, otherwise play short, puts, or wait until rise above. Play as a Gap Down: look for midpoint as first target to capture profits.

• This strategy uses the previous candles to determine strength of gap movement or rejection

• Note how after the drop the market fills the short gap to the open of green candle (note the dotted white line)

• After price is rejected, you can enter anytime after rejection, but I would select the open of the day as it breaks back down.

• Based on this example you could have held throughout the entire day or at least sold some at the 394 target (low of previous green candle)

• Use the previous candles as price targets.

When in a reversal, avoid entering on gaps.

• Doji or Spinning Top

  • You are in a bearish market and you are at the potential beginning of a reversal

  • If we see a gap up from a doji or spinning top, I am holding and waiting for the following candle as indicated in the above section

• Continuation candle that closes above doji, spinning top, or hammer

  • We could have already entered based upon our candle rising above the doji, spinning top, or hammer

  • In many cases, you will have a gap fill down and it will retrace the move since there was a gap up overnight, most likely from shorts closing their position and other shorts stepping in again

  • Taking Profits

    • You can stay long and wait for a breakdown on a lower time frame to sell (30 min/1hour)

    • Additionally, we can simply hold through our position until the gap fill, if it is not too far away, and to see if it bounces

    • Worst case scenario is that we are back to where we entered or our profit from the previous day