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Gap and Go Strategy

Author: George Thomas
by George Thomas
Posted: Nov 25, 2021
breakaway gap

What is the Gap and Go Strategy?

Trading is an adventure that has lots of ups and downs for traders. They can invest, analyse the market and use various tools and strategies to be at the top. One such catchy strategy is the Gap and Go strategy. As the name suggests, it world on the basis of gaps created in the pricing of the instrument.

It can be used for all types of markets and is a fast-paced strategy requiring quick actions from the traders. The easiest trading strategy of intraday trading strategy, which, however, limits its use in markets due to the fast actions. But, still, traders prefer the strategy for financial trades.

In the Gap and Go strategy, the risks are tight, with no complex indicators for the trade. Thus, making it a good trade strategy and attracting traders because of its simplicity.

The intraday strategy is based on day to day trading activities and market occurrences. When the market opens, it carries a gap in price from the previous closing of the trade. The price gaps are incurred due to the high volumes of trade which push the price, thus, resulting in a gap. The gap indicates the imbalance in the market trade.

Traders can use the gaps and study the market for predicting future price changes and other technical aspects. It is a simple strategy and a useful one if used properly.

Why do prices create gaps?

There are certain reasons which show the creation of price gaps; let's have a look at them in the below points:

  • The biggest reason for the creation of gaps in prices is the demand and supply factors of the trade. When the traders buy aggressively, there is a gap up. Traders demand more for the instruments of the market at the opening of trade with the fewer supply of the same, thus resulting in a gap. In contrast, there is a gap down when the supply is more and demand is low. In this, there is aggressiveness on the side of sellers of the market. So, the gaps in prices are always present in the trade of an instrument at the open and close of the market.

  • The overnight factor is also significant for the creation of a price gap. When there's a sudden change in the market or big news or any other fundamental impact, and an overnight sentiment occurs, it could be a reason for the gap in price.

  • Another reason for the gap is the money when it tries to skip the important support and resistance level. For instance, if there is a bullish trend, there is a gap up the price above the supply level. Similarly, in the bearish trend, there is a gap down below the demand.

What does the Gap Indicate?

The gap up is the bullish gap of the market; when the prices gap up, it indicates that the open price of the market was higher than the previous day's closing price. Whereas the market opens with a low price and the previous closing was higher, then it is a gap down, also called the bearish gap.

Traders use the gaps to have signals about the support and resistance levels. However, traders get confused with this and can make wrong decisions. For correct decisions, traders should have a good market knowledge and its aspects with updated information.

There are various types of gaps in the market:

  • Breakaway gap

  • Runaway gap

  • Exhaustion gap

Breakaway Gap

A breakaway gap is created at the start of the trend in the market. The price of the instruments breaks away and creates a gap from the previous closing price of the trade. It is more validated when the traders check it in the context of the market trend.

The price of the instrument in a breakaway gap should move in the same direction and maintain the trend.

Runaway Gap

The gap occurs in the middle of a trend; the runaway gap takes place when the market signals more room to run. Traders can recognise the runaway gap by analysing the overall market trend. The gap is even better when it accords with the breakaway gap and is validated with an existing trend. However, traders should be careful with the runaway gap as it further indicates the price movement.

Exhaustion Gap

It is the final step of the gap created, in exhaustion the price gaps after establishing the trend of the market. Traders can also say that it is the last push of the price before they consolidate or make a change in trend.

Pros and Cons of Gap and Go Strategy

Gap and Go strategy offers the traders some advantages and disadvantages. We have listed below the two for better use of the strategy in the trade practices.

Pros:

  • Easy to identify and use

  • Basic scans are available

  • Perfect for day traders

  • Traders can earn high profits

  • Long and short term trade entry is possible

  • Pre-configured scans

Cons:

  • Gaps lead to high volatility

  • High spreads

  • Requires good research

Conclusion

The Gap and Go a strategy is a good option for traders to study the price fluctuations and have a quick trade. It is best for the day traders and is helpful for the fast execution of the trade. Traders can use the strategy with the help of brokers such as ETFinance; they offer essential tools to make trade more confident. Read our Etfinance Review.

However, traders should first have good market knowledge and skill to use it. As it requires research of the market and good trade practices for decisions and actions. Therefore, traders should study the market trends and then use the Gap and Go strategy.

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Author: George Thomas

George Thomas

Member since: Jul 14, 2021
Published articles: 16

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