December 7

Gap Trading Strategies (A Beginners Guide)

Last Updated on 7 December, 2022 by Samuelsson

Gap Trading Strategies: A Comprehensive Guide

Gap trading is a popular trading strategy used by many experienced traders. It involves taking advantage of price gaps in the market to make a profit. When used correctly, gap trading strategies can be a great way to make money in the markets. In this guide, we’ll cover the basics of gap trading, different types of gap trading strategies, and how to get started.

What is Gap Trading?

Gap trading is a trading strategy that involves taking advantage of price gaps in the market. A price gap occurs when the price of an asset moves significantly higher or lower within a short period of time. These gaps can be caused by a number of factors, such as news, market sentiment, or even technical analysis. Traders who use gap trading strategies look for opportunities to take advantage of these price gaps by either buying or selling the asset in question.

Types of Gap Trading Strategies

There are a few different types of gap trading strategies that can be used by traders. These include breakaway gaps, exhaustion gaps, and continuation gaps.

Breakaway Gaps

Breakaway gaps occur when the price of an asset suddenly moves higher or lower after a period of consolidation or trading in a tight range. These gaps typically indicate a shift in sentiment and can be used to identify potential entry points.

Exhaustion Gaps

Exhaustion gaps occur when the price of an asset moves sharply higher or lower after a period of sustained price movement. These gaps can be used to identify potential exit points, as they often indicate that the current trend is nearing its end.

Continuation Gaps

Continuation gaps occur when the price of an asset moves sharply higher or lower in the same direction as the current trend. These gaps can be used to identify potential entry points, as they often indicate that the current trend is likely to continue.

How to Trade Gaps

Now that we’ve covered the basics of gap trading, let’s take a look at how to trade gaps. When trading gaps, traders should look for opportunities to buy or sell the asset in question based on the type of gap. For example, if a breakaway gap occurs, traders should look for an opportunity to buy the asset in question. Similarly, if an exhaustion gap occurs, traders should look for an opportunity to sell the asset.

Risk Management

It’s important to remember that gap trading strategies carry a certain amount of risk. As such, it’s important to employ risk management strategies when trading gaps. These strategies should include setting stop-loss orders, taking profits regularly, and limiting your exposure to the markets.

Getting Started

If you’re new to gap trading, it’s important to start small and practice with a demo account before risking real money. This will help you get used to the markets and gain experience with gap trading strategies.

Conclusion

Gap trading strategies can be a great way to make money in the markets. However, it’s important to remember to employ risk management strategies and practice with a demo account before risking real money. By following these tips and using the right gap trading strategies, you can start to make money in the markets.


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