One of the most regular and largely misunderstood phenomena of trading, particularly for newer traders, is the gap. What precisely is a gap? What causes one to happen? And most importantly, how should one trade a gap when it occurs?
In this article, I’ll answer these questions, and delve into identifying higher probability assessments for trading gaps.
First, a gap is the discrepancy between one day’s opening price and the prior day’s closing price. The chart below clearly illustrates a large gap in the E-mini Russell 2000 (TF) which occurred on Monday, March 23. Note that the Russell closed at 397.40 on Friday the 20th, and opened at a price of 410.20 the following Monday, forming a 12.80 point up gap.
By any standard, this would be considered a very large gap (more than 3%). So what could have caused price to open so much higher? In this case, it was positive overnight news, the unveiling and positive...
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