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Gap Days

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I am currently reading Guppy's " Trading Tactics" and found one of the chapter referring to " Gap Days".

have been wandering if any chartists do use this type of indicator and what you think about this kind of approach ? :millhouse
 
In short term trading I will look to buy in the gap zone.
Particularly if the gap away was on moderate volume.
High volume may indicate a breakout and the gap never visited.
Extreme volume may indicate exhaustion.
Where the gap occurs in the life of a chart will also have impact on what sort of gap it is.
Breakaway
Continuation
Common
Exhaustion.
Can tell you a lot if your a Volume Range follower like myself.
 
Hi tech/a

I am asking about this, as i have observed the gap days with BHP.
I know that this is a high volume trading, but would it apply to basic indication : purchase stock on down trend where the gap just pop out assuming the gap will be covered (stock going up)
How would you know that this is not a break out but continuation ?
 
I haven't had all that much experience with trading gaps (not much of a day trader), but I've found it's handy to look at:

1 what events "caused" the gap
2 sentiment,
3 support and resistance levels
4 how the market depth looks like,
5 whether it's the bid or ask that's getting hit,
6 which way the market moves in the minutes following the open

More detail on that:

2. e.g. Extremely poor sentiment + high volume sharp gap down -> exhaustion gap

3. Sometimes it gaps right into where the resistance is so you might try to fade the gap + trade resistance at the same time.

4. and 5. Is it running out of buyers / sellers, etc.

6. Found quite often the breakaway gaps have a fair bit momentum, so if it's heading the other way right after open I'd be worried it's not a breakaway gap.
 
Looks like back to observations and further study.

Originally i ask about "Gap Days" is because Guppy stated that the gaps should be covered. So understanding this statement, if the gap appear on the way down (many sellers and volume is high) i may understand that the market is about to turn around (sometimes later on) and the price should go up to cover the previous gap ?

In case of BHP i did noticed that there is a large volume movement (even before market open @ 10 am). Some of the reasons i believe is to the news on TV and some of it is because sentiment to blue chip. This in turn produce gap days.
I hope that this info may be a good signal to closely look at the stock and potential buy signal....
 
Looks like back to observations and further study

10,000 hrs infact is what you'll need to become proficient.
Enjoy the journey (how to read a chart) and for the time being forget the destination (Making a profit).
 
and then you get bewt lil stocks like BHP that like to gap up and down constantly .......... just got to be on the right side of the gap
 
Just note that there are those who consider BHP gaps not valid as it has a UK counterpart, as well as an ADR one.
 
Just note that there are those who consider BHP gaps not valid as it has a UK counterpart, as well as an ADR one.

yes maybe not valid on a tech criteria viewpoint ........... but certainly very valid when trading the sucka
 
so how can a tell if the gap is going to be filled or the price is going to just continue on the uptrend?
 
You could probably have a fair idea that its going to respect the gap, you can see immediately as it drops back to test, not too much selling going on there, 3rd red candle after the gap is a reasonable entry, as its come down, but come back up to close where it opened, on slightly increasing volume from the previous candle.

Its possibly gapped up through something to the left, not to say it won't be filled sometime in the future, but immediately I think its possible to tell, you're probably more longer term though.

Just my Each to their own.
 
Anyone know of some good gap trading strategies? I've read somewhere I forgot that gaps close 90% of the time is that right? So is it simple enough to always go long after a gap down day and short vice versa or is it more involved?
 
Disclaimer at both ends, OMG: the best money I've made has been trading this sort of thing, but I DON'T trade it at the moment, and won't until I can get stats I'm confident of from proper back testing that'll give me long term outcomes. Seat of the pants stuff like this is how people blow themselves up. This is NOT a system, I just wanted to show you a possible way gap-filling could be exploited if properly developed.
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Sorry big post, becuase I've been thinking about this stuff a bit lately.

The way I've been tinkering with this gap trading on a day-trader basis (open to +1 hour or so) - feel free to smack me down, people who know more.

In my experience there are stocks that fill gaps more than others, and in this area I think it makes sense - if enough of the regulars "know" that the stock fills gaps, they'll be reluctant to play against it until it's filled.

So you can search for a stock that gaps-and-fills, get a percentage of times that it has filled a gap of X amount (some stocks rarely fill big gaps, some usually do) - on up days and down days - and get a number for the amount it moved with the gap after the open on those winning days before it turned and filled the gap.

Find a stock that fills gaps at a high percentage, preferably in a short time, and that tends to a low "with the gap" movement before filling, and then wait for it to gap enough to be profitable.

Then you can get an entry (either on the open or even just with the pre-open indicative) from the size of gap that you've calculated likely to be filled, and you've got your stop from the usual maximum movement from the open. Quite testable and sizable. Adjust %winners vs win/loss more towards your comfort that full optimisation (over optimisation being, of course, Certain Death, especially with such a lot of variables).

Further refine your exit by testing the time of day that a contrary move will tend to peak - it's been surprisingly consistent for the few stocks I've got working. Can also further refine entry / exit by waiting for a particular pattern or confirmation movement (eg enter after a simple move of x from the open in the direction of a gap-fill; exit with a trailing stop of y after the fill; etc). Anyway, you get the point.

I think the important part is that every stock is different, and some lend themselves to this much more than others. Crucially, I've found some stocks go into this mode of behaviour after they've had a bit of a panic - so a big fall or big jump. There are regulars (I've heard AAPL is mentioned for this stuff, though I've not looked at it - not in a position to day trade the US open), but a lot of the better targets seem to be "excited" stocks. They're just a lot more risky, because they'll probably stop soon.

So get those figures above on several timeframes. Shorter and more recent is more relevant, but much less reliable. Something that gives good results in all time frames are great, but there are also interesting opportunities on smaller timeframes if you want to chance them. That's where (even my rudimentary skills in) reading the DOM helps.

This is where I'm trying to get better at stuff like Amibroker. Gap-filling is an area where I think an individual stock's character is the important factor, not how patterns apply universally to all stocks.

---
PS: the best money I've made has been trading this sort of thing, but I DON'T trade it at the moment, and won't until I can get stats I'm confident of from proper back testing that'll give me long term outcomes. Seat of the pants stuff like this is how people blow themselves up. This is NOT a system, I just wanted to show you a possible way gap-filling could be exploited if properly developed.
 
Another T.A. tangent. LOL.

When is an exhaustion gap not an exhaustion gap?
When it has no accompanying volume apparently. Henderson Group has the signs of an exhaustion gap but not the volume. Will post chart end of next week to verify this is not the top for HGG according to gapology.
 

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Oops, my interpretation was awry. These things always work better retrospectively. LOL. I suppose engulfment of the gapping candle would be an enticement to enter short. Obviously volume isn't always necessary for an exhaustion gap. Why the little exuberance to buy at higher prices on the 14th/15th I wonder? Maybe this excerpt from the Aust. Financial Review ...
Yes, maybe so, but the smart money (cautious) wait for better prices.
 

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This might be of some help Whizzzi

CLICK TO EXPAND
 

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