Gap Trading Strategies: The Breakaway Gap Setup Part 2 馃憣

Share it with your friends Like

Thanks! Share it with your friends!

Close

Trading Breakouts: The Breakaway Gap Setup Part 2. http://www.financial-spread-betting.com/course/gaps.html PLEASE LIKE AND SHARE THIS VIDEO SO WE CAN DO MORE The bigger the gap the more likely it will lead to continuation.

The challenge when trading gaps is to determine what interpretation we should give to the gap. Gaps can mean different things depending where and when they occur. One general idea is that the larger the gap, the more likely the price is to continue in the direction of the gap. Thus if you choose to trade at this time, you will be looking for signs that show that a continuation is happening.

Interpreting this type of gap as a breakaway gap, you will see a trend, say an uptrend, prior to the gap. The gap occurs downwards and if accompanied by a lot of volume, is a strong indication that the market sentiment is turning to the downside.

The scenario shown in the video is a common one. The gap downwards is a strong indication that sentiment is changing, but you have to keep watching to see whether this is a continuing view, or whether the gap has overstated the market feeling.

Typically you may see a strong downtrend, but inevitably after time there will be a sign of a pullback, as is evident in all trending prices. You can watch the pullback carefully to see if it falters. There can be various signs of this, including very weak movement to the upside and a diminishing trading volume.

At the right time, which is a matter of judgment and experience, you may decide that the retracement or pullback has run its course, and the downtrend is commencing again. This would be an appropriate time to place a short trade, looking to ride a price going downwards again.

It鈥檚 possible that the retracement may come back up to the bottom of the gap. There are two ways it can go from here. As mentioned in the previous lesson, often the gap will provide support or, in this case, resistance and the price will reverse and continue its downward trend.

The alternative is that the price would continue back up, effectively filling the gap and showing that the initial breakout downward and following downtrend has failed this time. It will be considered a sign that the uptrend is in doubt, but still has sufficient support to keep going for a little longer.

The breakaway gap is just one of several different types of gap. It arises out of a strong sentiment that the current trend has failed, and the strength of the sentiment can be seen by the size of the gap, and by the amount of trading that has been happening after the price jump.

As we are looking at the chart from a technical analysis point of view, it does not matter why the sentiment has changed, we simply want to trade as the chart dictates to us. However, whenever there is such a strong reaction as a gap in price there is usually some event which has influenced investors to change their views. It is easy enough to go to the commentary section of the charting software to confirm what has happened to the security to cause the different reaction.

Comments

mahmoud akermi says:

what is the broker you use ?

aaa2782 says:

This is a great video I Day trade based on gaps

Comments are disabled for this post.