A gap is a relatively common technical pattern that can be observed in the stock, foreign exchange, and futures markets.

Compared to other indicators, gaps are easier to identify and represent excellent trading opportunities for most traders, with operations being quite straightforward. A thorough study can lead to significant profits.

Therefore, today's article will provide a comprehensive explanation of the basic knowledge and trading techniques of gaps, which I believe will be helpful to everyone.

1. What is a gap?

A gap on a chart is represented by a discontinuity in the quoted prices between two candlesticks, leaving a blank space.

Most of the time, the market quotes are continuous, and the candlesticks follow each other in an upward or downward trend.

Candlesticks are the visual representation of prices on a chart. There are two reasons for the formation of a gap:

(1) Changing candlesticks.

(2) Changing candlesticks while also experiencing a discontinuity in price.

For example, in the large gap mentioned above, the closing price of the previous candlestick was 25,821. When the candlestick changed, there were no quotes in between, and the opening price of the next candlestick was 25,762, thus forming a gap of 59 points.I have also written about eight other profit-making tips on my public account (Eight-Digit Garden). I suggest everyone read them together for a deeper understanding.

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2. Two situations that form a gap

Situation 1: Suspension of trading, opening forms a gap

Market trends are influenced by fundamentals. There is a time difference between the suspension and the opening of trading. The chart shows that the market has stopped, but the fundamentals have changed during the time difference.

For example, the announcement of new economic data, such as political events that affect the fundamentals, these changes will alter market sentiment. Traders' judgments on the direction of market trends may change. When the market opens again, a gap will form.

Forex trading is 24 hours, and the trading volume is large, which can always remain active. It only stops on weekends, so the gaps in forex opening and closing are mainly concentrated at the opening on Monday.

Special note:

In foreign exchange trading, the stock index futures varieties, such as the Hang Seng Index, Nikkei Index, and A50 FTSE Index, are synchronized with the stock market and will open and close every day. They often form gaps at the opening of the day (which is also most suitable for the trading method we are talking about today).

Situation 2: Data-driven gaps

Foreign exchange market trends are influenced by economic data from various countries, especially when important economic data is announced and important political events are released, there will be a discontinuity in the quotes. This will result in a price gap, which mainly appears in intraday trading.3. How to trade gap openings?

Gap openings serve as both support and resistance. Upward gap openings act as support, while downward gap openings act as resistance, and these roles can be utilized for trading in practical situations.

The trading methods for different types of gap openings are essentially the same. I will provide a few specific examples to illustrate the trading methods.

A: Trading after a break and opening gap

After the market opens, if there is a gap in the price movement, wait for the price to retest the support and resistance levels of the gap opening to enter long or short positions.

(1) Aggressive approach:

When the price retraces to the support or resistance zone, enter the order directly, and place the stop loss at the previous high or low point.

(2) Conservative approach

After the market opens with a gap, wait for the price to retest the gap zone and form a reversal candlestick before entering the position. Set the stop loss at the low point of the reversal candlestick. This approach is more conservative in terms of entry and offers a smaller stop loss space, resulting in a higher profit-to-loss ratio.

B: Trading gap openings during data-driven market eventsPay attention: After a gap, there is no quick pullback, but after a period of consolidation, the market then pulls back. The longer the consolidation period, the higher the probability that the gap will fail. Here, it is recommended to use a conservative entry method, which is to wait until the reversal candlestick is established before entering.

C: Futures Gap Trading

On the 1-hour timeframe, there are two gap openings, and both have pullbacks and subsequent downtrend movements in the market.

After the first gap appears, the market quickly pulls back and then quickly declines after confirmation.

After the second gap appears, the market consolidates for a long time before pulling back, and after confirmation, the downtrend movement is also relatively small.

Futures trading note:

For futures such as crude oil and gold, which are linked to the external market, the external market fluctuates 24 hours a day, but domestic futures have three trading sessions each day, with frequent breaks and openings, resulting in too many gaps.

These gaps are not due to changes in market sentiment or fundamental news, but are entirely caused by the breaks and openings. Therefore, the trading method of gap openings does not perform well in these varieties, and attention should be paid during trading.

D: Gap Trading in the Stock Market

In the stock market, gap openings are even more widely used. It is said that the Shanghai Composite Index has a trend characteristic of "filling every gap," and the technical methods of gap openings can also be applied in the stock market.(1) When the first downward gap appears at the top, the market establishes a bearish position. At this time, if one holds stocks, they should close their positions to cut losses when the market retraces to the gap, which can avoid the losses from a significant downtrend that follows.

(2) After the second upward gap appears at the bottom, wait for the market to retrace and confirm, then enter to buy stocks, followed by a substantial increase in the market.

4. Precautions

(1) Validity period of the gap

The shorter the time period used for market retracement after the formation of a gap, the better the validity of the gap.

(2) Combining the gap with support and resistance, as well as the resonance of top and bottom pattern breaks, will increase the validity of the gap.

In practice, the market may exhibit a gap break pattern. When the gap appears, the market also forms a pattern break. This resonance of pattern break + gap can enhance the validity of the gap.

When the top rectangle pattern breaks downward, accompanied by a gap, the break is decisive and rapid. After the market retraces to the gap, it falls quickly.

(3) The gap's established rise or fall can reach more than double the gap's space.

The space of a gap in the entire trend is relatively small, usually just the gap amplitude of a single candlestick. Since a trend is typically composed of dozens of candlesticks, once a gap is established and the trend is formed, the space created will usually reach more than double the gap's space. In trading, profit-taking can be set based on this characteristic.The above is my practical experience with gap trading. If you master these little tricks, it's not difficult to make money in the three markets.