1. Abstract

Some people likes to trade gaps because of this there are big probabilities of collect few amount of pips.
But the risk to approach it must be strategic and could be different to each situation.
Gaps often signal continuation with the direction of the open and close of that trading day.
But sometimes could be a sing of weakness if the GAP is filled in less that two trading sessions.

I found a particular situation on DAI, a Germany stock and I decided to go short on it.
In this article, I will tell you how the trade goes and the way as a suggestion to approach it.

2. Development

2.1 Open trade on DAI

I found this on my daily monitor, what I am looking is pattern formation such as Doji candles, inside bars, engulfing and so on.
This stock did some gaps the previous daily sessions and formed a bearish pin bar. At this level did few touches and
At this same level around 73$ per contract, the stock did few touches in the past and for me, this was a confirmation of a strong resistance.
this was a confirmation of a strong resistance.

The most incredible thing was to look an open GAP about of 240 pips.
That is crazy, I never saw a gap like this.

The next. was create a range to form a temporal support and resistance to measure my entry risk.
Also, was needed a projection of the target, to do this I did a projection between the recent lower low.
In this case was 80 pips stop loss and 280 pips target number one and 450 pips target two if the price action goes even deep.

The chart below, show us how looks like the actual trade on my live account, despite the amount or position size.
My plan is to trail the stop each day and let the market run the far as possible.

2.2 Open GAPs theory.

  • Breakaway or breakout Gaps.
The most profitable gaps are those that occur at the beginning of a trend, also heavy volume usually accompanies upward
but not necessary downward gaps.
The best is to wait if the gap is filled and if don't place an entry with the direction of the gap with the stop at the point where the
gap could be filled.

  • Opening Gaps.
When the opening price for the day is outside the range of the previous day, it is called an opening gap.
After the opening, prices might continue in the direction of the gap and it becomes a breakaway gap.
the next possibility prices might retrace from the opening and fill the gap.

  • Runaway Gaps.
Gaps that occur along a trend are called runaway gaps.
They can appear in strong trends that have very few minor corrections and just keep rising or declining without retracements
or other interruptions.
They are also called measuring gaps because, like pennants and flags, they often occur at about the middle of a price run.

3. Conclusions

Trade opportunities are most but capital is limited.
If you can approach a situation the most important is make a proper calculation of the risk.
I am not telling do not jump into the market, more like do it but knowing the maximum risk and let the market run.

The best investment is to get educated, and practice.....

4. References.

Book Technical Analysis edition two of Kirk Patrick, 2011
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