Gaps and How to Trade Them

Gaps 

Two types of Gaps More:

IR : Inside rangeTrading inside the previous session's range and tend to show... More but a gap More to the prior settlement. These gaps More tends to be filled more often than OR.

OR: Out of range these are more significant.

“Gaps More are important, and they announce that something has changed, or potential change.”– Jim Legend Dalton.  

An open gap More out of range(above or below the previous day’s session, high or low) signifies an important shift in the market participant’s thinking. The market is out of balance. 

One of three things can happen; 

1. Open Continuation: The move away from prior value continues (discovery mode) until an opposing force slows the auction. Balance is eventually re-established in a new area. DO NOT FADE THE INITIAL PRICE DISCOVERY. Wait for clues that a bottom/high is forming or formed.
2. Open Reversal: The Auction rejects the gap More and quickly reverses back to prior area of balance. 
3. Open Consolidation: Gap More acceptance, or at least takes time to think about. Buyers and sellers both agree, and the consensus is to form a new balance zone. Value is re-established.  
   • The time spent in acceptance is important, a balance that is established only for a relatively short period before returning to the prior balance area gives us essential information about the auction. 

Gap More Trading Rules

• Trade in the direction of all gaps More that don’t fill quickly onOvernight Session More the open. If you see initiation away from the gap More open this gives me a strong directional bias.
• The larger the gap More, the smaller the odds it will fill that day. Most gaps More will fill within the first hour of the session.
• 50% of a gap More fill can often be a good target, especially onOvernight Session More larger gaps More.
• Identify local references and levels and observe for signs of gap More rejection or gap More consolidation.
  • A gap More is rejected if an opposing force responds to the higher or lower prices, and the auction moves to close the gap More.
  • Possibility for gap More move to consolidate. This is typical for larger gaps More that find support /resistance at a prior reference. Balance rules.
• Observe volume. This is key.
  • Low volume and a weak attempt to close the gap More is a sign of weakness. Shorts taken.
  • High volume Impulsive PAPrice action More is a sign that the gap More may close or move away from the prior range will continue.

A look at some gaps More, to be appended