Gaps are created when there’s an imbalance of buyers and sellers in the market. In today’s video, I’ll talk about the strategies for trading gaps.
My name is Tyson Clayton, Senior Currency Strategist for Market Traders Institute. I’m a master Forex instructor with over 20 years of experience teaching student traders how to take ultimate control over not just their finances, but their lives.
Let’s say a stock is reporting quarterly earnings tonight after the closing bell. The stock is estimated to report a dollar’s worth of earnings, but it only lists 50 cents. When that happens, this negative report will most likely shock the market and the price will gap down as a result. In other words, the market should fall because there’ll be less buyers than sellers at that current level, which is how gaps are created.
There are different strategies for trading gaps. Sometimes you should look for a continuation of the gap, and other times you need to look for a reversal. You want to trade a continuation move when the price is a range bound area between support and resistance. However, there are also times when you should be trading against the continuation, which is called a reversal move. A reversal happens when the price is sitting at an extreme level, which refers to a multi-week, multi-month or multi-year high or low.
Traders must understand when and why to trade a continuation or a reversal. There’s a pattern that I look for in these situations called an island reversal. I try to find a gap in the pattern after prices move to an extreme level, followed by some type of reversal pattern, and then followed again by a gap down. These moves form a pattern that resembles an island, which professional traders often see as an opportunity to trade the gap fill.
For more tips and strategies on successful Forex trading, visit MTI’s YouTube channel at www.youtube.com/c/Markettradersinstitute/videos.
Source: https://www.markettraders.com/blog/how-to-trade-gaps-in-the-forex-market/