When looking at the financial chart, you sometimes come across an up or down gap. The appearance of that gap signals something to investors. This article will guide in detail what a Gap is and Gap trading means. There are two important types of Gap you need to know namely Breakaway and Runaway Gap as well as the meaning and how to trade using them.
A video introduces Gap in technical analysis
What is a Gap?
A Gap (as its name) is the gap created when prices move sharply in the upward or downward direction. If the price bounces higher than the closing price of the previous candle, it is called a Gap Up.
Otherwise, if the price falls lower than the closing price of the previous candle, it is called a Gap Down.
The reasons why Gap appears
– On holidays of the financial market (such as Saturday and Sunday or federal holidays), there might be some big news of fluctuations. At the beginning of the next week (such as Monday) or the day after the holiday, the Gap is likely to appear.
– When there is an event (bad or good news) that is extremely powerful and affects the financial market, it may cause banks to sell off a currency.
– At major holidays like Christmas or year-end, it is the time when many banks in the world stop trading. This leads to the lack of continuity in the transaction which is a condition for the Gap to appear.
Two common Gap types and their meanings
This type of Gap usually appears when the price breaks out of the support or resistance zone.
The price breaks out of the resistance zone by 1 gap (Gap Up). The market is likely to enter the uptrend. Also, the Gap Up becomes a Support zone.
Otherwise, the price breaks out of the support zone by 1 gap (Gap Down). There is a high probability that the market will enter a downtrend. And now, the Gap Down becomes a Resistance zone.
This type of Gap appears in continuation of a trend when the market is in an up or downtrend.
The price is in an uptrend, creating a price gap (Gap Up) and continues to increase sharply.
Conversely, the price is in a downtrend, creating a price gap (Gap Down). The price will then continue to fall.
How to trade Binary Options with Gap
Using Breakaway Gap as Support/Resistance
If you use Breakaway Gap as an entry signal, then Gap Up = support zone. Gap Down = resistance zone.
This is considered a price retest or filled Gap strategy. When the price strongly breaks out of a support or resistance zone and creates a gap, it tends to go back to test or in other words, fill the gap (recover the previous price gap).
Requirements: A 5-minute Japanese candlestick chart. The expiration time of 15 minutes
How to open an option:
UP option: The price goes into the Gap Up.
DOWN option: The price goes into the Gap Down.
Use Runaway Gap to trade with the trend
This is the long-term trading (long expiration time) in Binary Options. You can combine it with 1 trend indicator such as SMA30.
Requirements: A 5-minute Japanese candlestick chart. The expiration time of 30 minutes or above.
How to open an option:
UP option: The price is above the SMA30 and creates a Gap Up.
DOWN option: The price is below the SMA30 and creates a Gap Down.
Notes when using Gap trading
– The Gap is a probabilistic tool that needs to be combined with indicators such as SMA, RSI, MACD, etc.
– Determine support or resistance levels with Gap types to open orders correctly.
– Verify whether the Gap is with familiar candlestick patterns or not to increase the reliability
Let’s experience to trade binary options using Gap as an entry signal. This strategy might work on you, so you should try it on a Demo account first. Once you understand how to operate and the advantages of Gap trading, then you can think about making money.