The financial market contains many unique pattern formations that enable opportunities to make solid profits. Some trading techniques depending on those formations have considerable winning rates to make those strategies attractive to financial traders. The “Gap and Go” is a widely acceptable trading technique to global traders.
However, choosing a trading technique for live trading involves learning complete functionality and applying procedures besides limitations and advantages. This article will introduce you to the famous “Gap and Go” strategy, a comprehensive guideline to use on live trading besides chart attachments for better understanding.
What is the “Gap and Go” strategy?
In this technique, trade decisions come through gaps that occur during price movements. Usually, these are the gaps between the closing price of a particular period candle and the opening of the next candle. Many small-cap stock traders choose this technique to perform trading as they obtain more fantastic results through this strategy. The success rate is nearly 70-75%. Implementing this strategy is simple, identify gaps and place orders according to the market context.
You can trade many financial assets through this trading method, such as FX pairs, cryptocurrencies, stocks, ETFs, etc. Typically these gaps occur due to valid reasons, such as participants’ actions, important news, fluctuations in volumes, economic data, etc.
Depending on these reasons, the price may open higher or lower than the last days’ closing. During price movement, there are four types of gaps.
Continuation gap
It occurs during the current trend due to massive selling or buying pressure signals continuation of the movement.
Common gap
This type of gap doesn’t signal anything; it only declares massive price change due to participants’ actions.
Exhaustion gap
Signals to create a new high or low by appearing near the ending of any trend.
Breakaway gap
Signals trend changing by appearing near the finish line of the current trend.
How to trade with the “Gap and Go” strategy
The first part is to identify gaps in the chart. A 3% or above gap of the current day’s candle range is eligible for this trading technique. You can mark gaps by manually seeking yourself, or many scanners tools are available to sort out those gaps on the price movements, such as bar-chart scanner, pre-market scanner, etc.
Once you identify any gap, then observe the market context to learn the reason for that gap. It’s the part where you may conduct technical and fundamental analysis to understand the market data and predict the future movement of your target asset.
This trading technique allows determining entry/exit positions using momentum and volume indicators besides other market contexts. The macroeconomic events such as GDP data, employment data, CPI, interest rate, etc., cause fluctuations in volatility and traders’ actions.
Generally, two scenarios occur after any effective gap on any asset price:
- Either the trend remains intact and continues further as the current trend direction or a reversal price movement occurs;
- Price changes the trend.
You will find 3-5% gaps often at the stock market rather than the FX market. We are describing both short-term and long-term trading strategies below using this strategy.
A short-term trading technique
Here we use volume indicators to reduce risk and more accurate trading positions. There are often gaps in the weekly opening on the forex market due to participants’ actions or slippage. Sort out those gaps on the chart and seek the reason behind the price movement. In this way, you don’t need to hold your positions overnight. If there are no valid reasons behind that gap, then it is the gap that will give you a potentially profitable short-term trading position.
Often you will find this type of gap at the weekly opening on 5-min or 15-min charts. When that gap occurs, check the volume data when the exact opposite force increases on the volume take buy/sell order as the price will recover the gap.
Bullish scenario
The bullish trade scenario will be as the figure below.
Entry/exit
If the price opens at the downside, wait till the buyers come back to place buy orders. Meanwhile, the stop loss will be below the current low, and the profit target will be at the gap range.
Bearish trade scenario
The bearish trade scenario will be something like the figure below.
Bearish setup
Entry/exit
If the price opens at the upside, wait till the seller comes back to place sell orders. Meanwhile, the stop loss will be above the current high, and the profit target will be at the gap range.
A long-term trading technique
This trading technique involves using volume indicators. It is a suitable trading technique for time frames of H4 or higher. Identify the gap on your target asset chart and seek the reason behind it. When you find a valid reason, then make trading action. Valid reasons mean fundamental market context that may push the price higher or cause more decline.
Bullish trade scenario
The bullish scenario will be like this figure below.
Entry/exit
When you find these gaps on a bullish trend or near the ending of a downtrend, place buy orders above the gap with stop loss below the gap. Close the buy position when significant buying pressure comes up, and the price starts to slide.
Bearish trade scenario
The bearish trade scenario will be something like this figure below.
Entry/exit
When you find these gaps on a bearish trend or near the finish line of an uptrend, place sell orders below the gap with stop loss above the gap. Close your sell position when the bearish trend ends, and buyers begin to come back.
Pros and cons
| Pros | Cons |
| This trading technique has a considerable winning percentage. | A 3-5% gap may be common in the stock market but not in the FX market. |
| You will get frequent trading positions on the stock market to trade with this strategy. | It requires an acceptable level of understanding to learn the reasons behind gaps. |
| Easily applicable trading technique. | It needs to follow reliable sources to follow news and spend time in front of the monitor for a specific period. |
Final thought
These strategies above have the potential to make profits when you get particular setups on the charts of your target asset. We suggest mastering these methods by demo trading, so you don’t need to risk your trading capital to learn the potentiality of this technique.
