What are PRICE GAPS and how do they provide trading opportunity?
The FP Markets Insight team compiles bite sized strategy insights for our traders. The idea is for you to learn something new and try it in your trading to help refine your skills.
This week we focus on trade setups, ‘PRICE GAPS’.
Price Gaps appear in the charts in all time frames as a place where “no trading” has taken place at an available price increment. For example, the closing price for XYZ is $6.55 and the next opening price is $6.58, XYZ stock now has a Gap where no trading has taken place at $6.56 and $6.57, leaving a visible Gap in the chart.
These Gaps provide trade setups and future price targets. It is not considered to be a Gap if the trading range fills the price Gap immediately on the next Bar or Candle. Often stocks will present “patterns” when the Gap might be filled. Telstra for example can take 5 -12 days to fill a Gap in price.
It is a pricing phenomena that Gaps are always filled often taking days or years. The recent BHP $14.06 low in January 2016 tested a price Gap which was left open from January 2005. In the short term, Gaps are helpful to determine price tops and price lows. A close look at your charts will show a high correlation of extended prices and a resultant Gap down as a turning point. This observation also applies to the lows of markets with an opening Gap, often refilled within 3 trading periods, as a “retest” of the low. It shakes out the inexperienced of what is a high probability turning point. As a tip, scroll back in your charts and put this to the test. Make a note of the time it takes to fill a Gap. Did this provide a trading opportunity?
Here’s an example PRICE GAP.