Trading Strategies for Gaps | Effective Strategies for Trading Gaps

When seizing disparities between the opening and closing prices of a cryptocurrency is the goal, gap strategies are what traders need. These strategies are based on different gap concepts such as breakaway gap, runaway gap, and exhaustion gap. 

This article explains what is gap trading in cryptos and unveils some suitable, easiest but also powerful strategies.

Overview: Cryptocurrency Gap Trading

Gap trading is all about spotting gaps and interpreting forthcoming opportunities driven by the technical and fundamental factors that cause a disparity between the opening and closing prices of an asset.

Between the technical factors provoking a gap, traders can find volatility and liquidity imbalances as the principal causes of price disparities in cryptocurrencies.

Fundamental factors can be a prior driver for those imbalances. Impactful news and events can spur a rush of buyers and sellers toward a specific direction, resulting in sharp movements that cause the differences between the opening and closing prices.

How Gap Trading Works: To-fill and Not-to-fill

The markets tend to move within phases of trends, ranges, and reversals. There are three types of gaps that provide insights into the potential beginning of each of these phases.

The essential idea is that traders may spot these gaps and take advantage of them by anticipating such phases.

Other relevant concepts regarding gaps and how trading them works are the to-fill and not-to-fill potential movements following a gap appearance.

Depending on the type of gap, they will be filled relatively quickly following their appearance or much later at the end of a phase or price pattern.

That filling move can be an opportunity for traders to seize.

Types of Gaps

• Common Gaps: these occur within the normal price changes of a crypto asset. Typically, the market tends to fill common gaps quickly as the market participants follow the news movements.
• Breakaway Gaps: these precede a new trend trading season and can emerge as a breakout from a consolidation phase or at the end of a pattern. It is less probable the market may fill these gaps in the near term.
• Exhaustion Gaps: these come out near the end of a trend or price pattern as a last burst signaling a final attempt to reach new highs or lows but fail, indicating a potential reversal move.
• Runaway gaps: they appear in the middle of a trend or price pattern and signal a momentum phase as buyers or sellers share a common sentiment of directional continuation. These gaps tend to remain unfilled for an extended time.

How Crypto Traders Can Take Advantage of Market Gaps

1. During a Breakaway gap, traders might enter a trade at the start of the gap, forecasting the price will continue in the gap's direction. Measuring breakouts can be vital here.
2. In a Runaway gap, traders would be interested in entering trades in favor of the prevailing direction in which the gap occurs. Identifying momentum entries and exits can be crucial.
3. When an exhaustion gap is likely to occur as a consequence of market saturation, traders can look for pullbacks or effective reversal trades. This approach demands spotting key price action patterns and price levels.

Gap and Go Strategy

The ‘Gap and Go’ strategy is a traditional approach among stock traders. It involves identifying stocks that have gapped up or down at the market opening and entering a trade in the direction of the gap.

For crypto, we can use the term 'gap and go' to pinpoint a crypto asset that is likely to return to its average price in a relatively short time after the gap occurs, leaving traders with a window to capitalize.

A prior step here is to correctly spot gaps in the market and their likelihood to form. When doing this, if traders are confident that the gap up is not weak and they have correctly identified the gap ahead of time, then they can enter long (bullish).

A prudent technique is to measure the volume of the asset and the reason why it is gapping up. The key to this strategy is to look for high-volume gaps, as these are more likely to continue in the gap direction.

• Traders may set entry points just beyond the price range, expecting a breakout.
• A stop-market order can accomplish this objective while using stop-loss orders to manage risk.

This strategy works well in markets with strong trends and can be particularly effective when a gap occurs due to a significant news event.

ICT: Breakaway and Fair Value Gaps Strategy

Fair value gaps in the Inner Circle Trading framework indicate imbalances in the market and imply both directional moves and retracements.

FVGs can be classified into two types:

1. Breakout FVG: This is essentially a breakaway gap that occurs during strong directional moves.
2. Inside bars FVG: These are formed within trading ranges. An inside bar formation indicates an area to be filled later in a retracement movement.

Session Opening Gap: Strategy For Seizing First Price Moves

This strategy focuses on gaps that occur at the session opening.

The central idea of this strategy is the rapid execution and closing of the trade ahead of a significant gap to capitalize on the initial intraday momentum.

Scalpers and news traders can take advantage of this approach and should have clear entry and exit strategies.

Gap Up Trading Strategy

In the gap-up strategy, traders can look for cryptos whose candles open higher than their previous close.

This is often a sign of buying momentum and high interest in the market sentiment.

Monitoring volume is crucial here, as higher volume increases the reliability of the gap.

Gap Down Trading Strategy

Conversely, in the gap-down strategy, traders can look for cryptos whose candles open lower than their previous close.  

This is often a sign of selling momentum, denoting a shift in the market sentiment. It is based on the premise that the price will decline.

Gap-down situations can sometimes lead to significant selloffs as the market panics, at least in the short term.

Conclusion

Gaps strategies involve identifying potential upside and downside movements in the market following a disparity between the opening and closing prices of crypto assets. Fundamental and technical factors play a role in these strategies.

In Altrady, traders can use volume indicators and charting tools to spot and seize each one of these strategies. Sign up for a free trial account today.