Classic chartists have divided gaps in three groups:
Traders Gap: A gap that starts a a new trending move up or down.
Amateur Gap – one in the same direction of an already extended move, and typically ends the move. This is also called an exhaustion gap. Since amateurs get caught in this, we are calling it by a different name.
Continuation Gap – one that continues a move, typically at half-way points.
Questions to ask on Gaps before trade
Does the Gap create a compelling pattern?
Where is the next area of Support or Resistance?
Did it Gap from a consolidation or from an already extended move?
Is the Gap too excessive to invalidate a favorable Reward-Risk?
Does it set up a compelling pattern intra-day after the Gap?
Is the Reward-Risk at least 3:1?
If so, enter and manage in between per your Trading Plan.
Down gaps that turn Bullish
Oversold stock with little congestion to the left
The stock gaps down significantly and then rallies strongly to the open, on Increased Volume (Vol.)
Bar closes with a positive Wide range Bar on the 30-Min. chart, at or through intra-day resistance
The positive Wide range Bar should have a very small, if any, lower shadow. Look for a bullish intra-day entry, and manage in between.
Up gaps that turn Bearish
The stock gaps up significantly and then declines back to the open, on Increased Volume (Vol.)
Bar closes with a negative Wide range Bar on the 30-Min. chart, at or through intra-day support
The negative Wide range Bar should have a very small, if any, upper shadow. Look for a bearish intra-day entry, and manage in between.
