Gaps are a popular pattern for market technicians to analyze and from which to profit. The reason is that gaps are easy to identify, and the specific characteristics of a gap are easy to quantify. This means we can apply statistical analysis on the various aspects of a gap to determine if there is opportunity.
But before we get into the strategies around gaps, we must understand exactly what a gap is, and how we can deconstruct them so that we can identify an edge.
Basically there are two types of gaps; gap ups and gap downs. Don’t confuse this with bullish or bearish, because we won’t know whether the market is bullish or bearish until the post gap analysis. And there are odds associated with a post bullish or bearish move, based on the gap characteristics.
We will develop a gap language so that we can easily communicate the type of gap, and that language is very precise. That’s what this video is all about. Once we have the language down, we can then model a strategy that reflects these gap aspects and backtest scenarios, so that we can identify statistically probable trades.