The Gap and Go strategy are among the most popular trading strategies. It enables traders to make significant gains by capitalizing on gaps. Why do such gaps appear and what are the causes of gap formation? What is the Gap and Go strategy? And how can you also take advantage of Gap and Go strategy?
These are very important questions and you need to know their answers. Therefore, we decided to dedicate today’s post to Gap and Go strategy. In this definitive guide, you will be learning answers to these questions. Let’s dive deep without wasting even a sec!
What are the gaps?
Gaps refer to particular situations on a price chart where prices of financial instruments open significantly below or above. That means prices of financial assets open after creating a gap below or above the close of the prior session. In other words, prices open after forming a hole or discontinuation. For example, the stock of the company closes at $10 at the end of a session. When the market opens on the next session, it opens at $12. What is it? It is the gap we discussed a short while ago. The stock should have opened at $11. However, it directly goes to $12 without quoting $11. It actually formed a gap above.
How do you identify a gap in price charts? You can identify a gap by looking at the candlesticks. You can easily see if there is a missing piece between two candles. Moreover, gaps may appear in almost all markets including stocks, forex, commodities, and exchange-traded funds (ETFs).
Why do gaps appear in financial markets?
There are several reasons, including both technical and fundamental, that cause gap formation. The most common and notable reasons include:
- Economic data – economic data may cause gap formation. For example, if the US releases strong economic data, the chances of a gap up between EUR and US pair.
- Earnings – earnings also cause gap formation. For example, if a company reports strong earnings, its stock price may form a significant gap above.
- Other reasons – other notable reasons include mergers and acquisitions, analyst picks, involvement of a big investor like Warren Buffet, etc.
Knowing why gaps appear is just for your knowledge. It isn’t necessary to learn why the gap appeared. The important thing, however, is to identify a gap and use it for optimal results.
Gap and Go strategy defined
Gap and Go strategy involves buying assets that form a gap above the closing price of the prior session. It is a highly useful and fruitful strategy. However, it requires you to be highly disciplined in your trading. You need to be ready when the next trading session begins as you need to keep an eye on opening prices.
How to trade Gap and Go strategy
In the simplest terms, Gap and Go strategy involves riding the momentum of an asset’s price. It is a simple strategy but you have to be careful when looking for an asset-making gap. Moreover, you have to act pretty quickly and analyze all the clues to enter a trade. The following three key aspects help you in this regard.
As you already know, volume is one of the most important metrics and it is easily available to you. Traders must be able to know the importance of high or low volume, especially if you have to enter a trade at a support or resistance level. For example, volume indicates whether the bulls will maintain control or not. That means whether the price will be able to break through the resistance and go high or not. Similarly, the volume gives you a good idea of whether the price will go further up after forming the gap above.
Volatility is also a key aspect in trading that everyone should need to know about. Higher volatility sometimes causes unexpected but substantial swings in prices. Why so? Because you never know when emotions will get better in technical analysis. When it happens, irrational market movements follow. Therefore, volatility is important to keep in mind.
3. Risk tolerance
It is absolutely imperative for traders to define their risk tolerance even before they enter trading. When you have the predefined risk tolerance, you can easily set the stop-losses when trading Gap and Go strategy.
These three aspects will help you analyze the situation quickly and enable you to enter the trade with ease. Now, let’s move to how Gap and Go strategy will work for you.
Gap and Go strategy – a tested setup
Gap and Go strategy, as we already know, is used when a financial asset forms a gap above. So, how do you find assets with opening prices significantly higher than closing prices of the prior sessions? The answer is – by using reliable premarket scanners. Although it is possible to identify the gap with the naked eye, using a scanner gives you an edge. It helps you in finding gappers pretty quickly. Moreover, you can use parameters of your choice such as a gap in $ or gap in percentage terms, price, volume, and so on. Thus, you can find assets that meet the requirements of your overall trading plan.
Moreover, Gap and Go strategies are simple to execute when you enable yourself to find gappers pretty quickly. The first thing you need to do is see volume. The volume must be high. However, it is important to note that volume usually decreases after the gap formation. But still, it should be relatively higher.
Now, if you see that the price of a particular asset opens with a gap accompanied by higher trading volume, you are good to go. Remember that you cannot possibly predict how much prices will rise. Prices may continue to rise for the whole trading session, they may rise for one hour, or whatever. Your trading goal is to make as much profit as possible.
How to manage your risks
Although Gap and Go strategy is generally considered highly fruitful because prices often rise after forming a gap above. However, trading is an arena where anything can happen at any time. Therefore, it is important to be ready for any type of situation. That said, it is important to manage your risks using stop-losses. The best way to decide where to set stop-losses is to use the risk/reward ratio. Here comes the role of your predefined risk tolerance. Thus, you can quickly decide where you need to set stop-loss.
Gap and Go strategy – the wrap-up
Gap and Go strategy is among the most important and highly fruitful trading strategies in the financial markets. Its execution depends on a particular market situation where a financial asset opens above the previous session’s close. Gap and Go strategy simply works on the principle of finding such assets and riding the uptrend. The strategy is also simple to execute and requires you to have a few aspects in mind. However, you need to be quick in processing clues and act immediately. Reliable premarket scanners are good tools to capitalize on when using Gap and Go strategy. So, it is a simple strategy. It is also pretty easy to execute. But it brings a lot of gains for you, even beyond your imagination.