Brief Summary
This webinar, presented by Trade The Pool, focuses on gap trading strategies, highlighting the importance of identifying different types of gaps and tailoring trading approaches accordingly. It covers classic gap fills, partial gap fills, runaway gaps, and news-driven continuations, emphasising risk management and the influence of market context. The session also touches on the use of Fibonacci retracements and extensions for identifying key levels and potential targets.
- Gap trading offers replicable and reliable setups across various asset types.
- Identifying different gap types is crucial for selecting the appropriate trading strategy.
- Market context and gap size significantly influence gap behaviour and trading outcomes.
Webinar Starts
The webinar is an introduction to gap trading, which will be covered in two parts. The first part will focus on multiple setups, and the second part will focus on risk management and the intricacies of trading. Gap trading is highlighted as a replicable and reliable setup, offering consistent, high-probability trades.
Introduction
The presenter introduces the concept of gap trading, explaining that it involves more than just gap fills and extensions. It's important to identify the differences between traditional gap fills, gap continuations, post-earnings gaps, and news trading gaps. Intraday gaps, particularly in small-cap stocks, also present unique trading opportunities. There can be between five and fifteen tradable gaps in the market every day.
Why Gap Trading Dominates
Gap trading provides clear risk-reward setups with defined entries and exits, reducing guesswork. The market often reveals its intentions through gaps, allowing traders to play mean reversion or trend continuation moves. Gaps occur across all asset types, including Forex, and are effective in various market conditions. Gap trading strategies are also suitable for accounts of all sizes.
Webinar Pillars
The webinar aims to provide a complete gap classification system, enabling participants to recognise and trade different gap setups effectively. Matching the right strategy to the right gap type is emphasised, along with advanced timing techniques for entries and exits. Risk management is highlighted as crucial, with gap trading offering well-defined levels for setting strict trading parameters.
The Complete Gap Taxonomy
A gap is defined as a price discontinuity between trading sessions or time frames, creating an imbalance. Imbalances tend to be tested, with about 70% of gaps testing but not completely filling. Market psychology drives these moves, with fear causing oversized gap downs and greed fuelling gap ups. Smart market participants often engage in rational repositioning, fading overextended moves and reconfirming moves by testing gaps.
6 Types of Tradable Gaps
The six types of tradable gaps are: classic gaps (gaps between open and close prices), partial gap fills (where gaps don't completely fill), earnings and news gaps (driven by fundamental news), breakaway gaps (initiating new trends), runaway gaps (accelerating existing trends), and exhaustion gaps (signalling trend completion). Exhaustion gaps often occur on very high volume and signal potential trend reversals.
Gap Size Classification
Gaps can be classified by size: small (quarter to half a percent), medium (half a percent to 2%), and large (2 to 5%). Small gaps on instruments like SPY almost always fill. Medium gaps may partially fill, and larger gaps are often news or earnings-driven. Very large gaps represent significant fundamental shifts and require special trading approaches.
Market Context, Gap Behavior
Market context significantly influences gap behaviour. Trending markets produce more breakaway and runaway gaps that don't always fill quickly. Bear markets increase the likelihood of gap fills and rejections. Range-bound markets offer the most reliable gap fill opportunities. High volatility creates more gaps but makes their behaviour less predictable. Sector rotation can help predict gap continuations.
Classic Gap Fill Setups
Classic gap fills occur without significant news and have a 70-80% fill rate. Traders should wait for price action and confirmation before entering gap fills, typically 15-30 minutes after the open. Stops can be placed beyond the gap extremes with a volatility cushion. Targets should be set for the full gap fill, but partial profits should be taken due to the possibility of gap continuations.
Partial Gap Fill Strategies
Partial gap fills are common, and the 50% fill level is significant. Gaps that hold partial fill levels often signal strong momentum in the original direction. Multi-touch gap fills, where price stair-steps down into the gap, can lead to explosive moves in the original gap direction. Failed gaps provide high-probability reversal setups.
Runaway Gap Strategies
Runaway gaps signal continuation and acceleration in strong trends. They occur on moderate volume (120-200% of average). Targets can be projected using Bulkowski measured moves or Fibonacci extensions. Multiple runaway gaps in sequence signal extremely strong momentum. Sizing up positions can be considered due to the excellent risk-reward ratios.
News-driven Gap Continuations
News-driven gap continuations, including earnings and FOMC days, reflect fundamental shifts. Earnings beats plus raises have a high continuation rate (70-80%). A delayed market reaction to news, with a modest gap up followed by consolidation, can present good entry opportunities. Sector rotation opportunities should be considered, and identifying the fundamental change is key.
Key Takeaways
The key takeaways are that gap trading involves more than just filling gaps, with specific classifications for different gap types that require different trading approaches. Gap size and market context are crucial, as gap behaviour is dictated by these factors. Gap trading requires systemic classification and risk management due to the variety of gap types and their different reactions.
Q&A
The Q&A session covers various topics, including the use of automated trading strategies, examples of gap setups from prior trading days, and strategies for handling stop-losses. The presenter also discusses the use of Fibonacci retracements and extensions, volume profiles, and news sentiment in navigating key levels.
