Gap Up Opening in the Share Market: Understanding and Trading Strategies
Understanding the concept of a gap up opening in the share market is essential for traders and investors alike. A gap occurs when the closing price of the previous day and the opening price of today show a significant difference. These gaps are often a result of news or events that trigger a significant market movement.
What is a Gap in Trading?
A gap in trading happens when the closing price of the previous day and the opening price of today have a noticeable difference. Gaps can be generated due to unforeseen events, earnings reports, or significant news that influence market participants to act in the pre-market or after-hours trading sessions.
Types of Gaps
Gaps serve as indicators for significant changes in market sentiment. Let's explore the different types of gaps:
Gap Up
A gap up occurs when a majority of market participants believe that the price of a share will continue to rise, indicating that the trend is not yet mature. This type of gap appears during the middle of a trending market and is a signal of a market move in an upward direction.
How to Trade a Gap Up
The best strategy to take advantage of a gap up is to enter the market once the first candle is formed. This allows the confirmation of the market move and the establishment of a solid trading entry point. Traders can use various technical indicators to identify such entry points, such as the emergence of a bullish engulfing pattern.
Gap Down
A gap down, as the term suggests, indicates a move in the opposite direction of the previous trend. This occurs when a large portion of market participants change their outlook on the stock's price direction.
How to Trade a Gap Down
For a gap down, traders should operate in favor of the gap once the market has dropped significantly. Technical signals such as the appearance of a bearish engulfing pattern or strong selling pressure within the first minutes can signal the entry point for traders. Risky traders may enter the market immediately upon seeing the price drop, while more conservative traders may wait for the first pullback to ensure the downward trend is confirmed.
Exhausted Gap
An exhausted gap, also known as a continuation or exhaustion gap, typically occurs near the end of a trend as a final push towards new highs or lows. This gap is more challenging to identify because it can happen within a trend market and is only confirmed after the trend has passed.
How to Trade an Exhausted Gap
Traders should operate against the direction of the exhausted gap. Once the market is seen to have exhausted its upward or downward momentum and is likely to reverse, traders should enter the market accordingly. For instance, if the exhausted gap is exhausted upwards, traders should enter a short position.
Trading Gaps for Day Trading or Swing Trading
The overall trading strategy for gaps can vary depending on the trader's preferred time frame. Intraday traders may opt for shorter time frames like 5, 15, 30, or 60 minutes, while swing traders may focus on daily frames. The core principles remain the same, but the duration of the operations will differ based on the trader's style.
Further Reading
For more insights into trading, consider exploring the best investment newsletters to profit from stock trading. These newsletters often provide detailed analysis and expert advice that can enhance your understanding and trading strategies.
By understanding and effectively using gap trading strategies, you can enhance your ability to navigate the volatile world of the share market.