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What is a gap?

A gap is the difference between one asset's opening price and the previous day closing price. A bullish gap (or gap up) is when that difference is positive, because the opening price is higher than the previous close. A bearish gap (or gap down) is the opposite situation.

gaps on dax future

Trading a gap

There is a popular belief that the gaps fill. Therefore, a strategy to take advantage of the filling of the gaps is to open a position against the direction of the gap, ie buying if there is a bearish gap and selling if there is a bullish gap. However, there is also another popular belief that the opposite happens, and the gaps are signs that indicate the continuation of the trend...

On this website we always refer to the first option, so the trade is against the gap.

The parameters of the strategy

The size of the gap: Entering the market with very small gaps, we risk that the whole gross profit vanishes due to commissions and slippage. On the other hand, if we enter the market only with very large gaps, perhaps there are not enough opportunities of trading.

The size of the stop loss: Some gaps will not close. How many points are we willing to lose before leaving the position? A stop loss placed too close to the entry price will cause to close our position with loss, although that position may later have become winner. However, the farther is located the stop loss, the lower will be its effectiveness.