Trading Futures……… Growing Profits

How to interpret gaps

Gaps

A gap occurs when the range of prices for a day is completely outside the range of the previous day. Gaps primarily reflect a change of attitude toward the market by traders. Usually, some fundamental news has dramatically changed the direction of the market from market closing one day to the opening of the next day.

The following examples should help to illustrate some common types of gaps.

Figure 1 Gaps Caused by Foreign Market Trading.

The market doesn’t like gaps, and most of the time, it will eventually come back to fill the gap.

Figure 2 The British Pound traded locally in Chicago.

Keep in mind the impact of worldwide interest in a market. Notice how many gaps there are in the Chicago chart.

Figure 3 Globex British Pound, traded around the world 23.5 hours a day.

You can see in this chart that most of the gaps are absent. The gaps on the Chicago chart were made while we were sleeping. Night trading has changed the nature of trading since our world has become computerized. (No rest for the weary trader!)

Figure 4

Breakaway Gap

Breakaway Gaps occur when a market “breaks away” from congestion. Generally, the upward move is dynamic, because traders with short positions are scrambling to get out of the market.

Figure 5

Exhaustion Gap

Exhaustion Gaps happen near the end of a move and signal the last effort of the market. This gap is generally followed by two or three days of market trading inside the range of that day, creating the look of an island. If the market trend reverses and trades outside the range of the gap, it is wise to trade with the reversal trend after it has been confirmed.

Figure 6

A Midway Gap

A Midway Gap occurs when the market has been trending for several periods, followed by three to five periods of consolidation. Following the consolidation, there is a gap in the direction of the trend. This is sometimes referred to as a measuring gap.

Figure 7 Island Top

Island Tops and Bottoms

No, we’re not talking about bikinis, here. An island formation is probably the least common type found on charts. In order to be an island, there must be a price gap on both the left and right sides of the island. This type of activity can occur on just one day or over the span of several days. The wider the gap, the greater is the likelihood that it is indeed a signal. This is the same type of chart pattern as a gap, and should be treated as such.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Subscribe to our Trading Service Free for 30 Days

Here’s what real investors like YOU have to say about Visible Trends-

Jim: I finished reading your futures trading newsletter last night. Thank you for sending it. It is one of the best and most comprehensive pieces I have read on the economy, and we read several newspapers every day, including the Wall Street Journal. I marked my calendar for March 13, looking forward to your next newsletter. Cheers... Al Bradshaw

Tag Cloud

Disclaimer

By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that JL Futures believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. This material has been prepared by a sales or trading employee or agent of JL Futures and is, or is in the nature of, a solicitation. This material is not a research report prepared by a Research Department. Distribution in some jurisdictions may be prohibited or restricted by law. Persons in possession of this communication indirectly should inform themselves about and observe any such prohibition or restrictions. To the extent that you have received this communication indirectly and solicitations are prohibited in your jurisdiction without registration, the market commentary in this communication should not be considered a solicitation.