The closing the gap strategy is a fundamental trading technique that focuses on price gaps. A price gap occurs when there is a sudden jump in an asset’s price. These usually happen after major events, holidays, or other occurrences that might cause the market to close for a period of time. This can create gaps between the last reported price and the current price, and the natural inclination of the market is to close this gap.
How Should One Apply This?
The application of this trading strategy is actually very easy. When a price gap occurs, you trade against the recent gain, and into the past price. History has shown that corrections happen more often than not, and binary options are a great tool to use for this because gaps occur in all types of assets, and they happen in both directions. Binaries are the only type of trading tools that allow you to trade in either direction with all asset types for no additional cost.
What you will find works best with this trading strategy is to find opportunities where gaps are more likely to happen than others and wait for a chance to materialize. What’s not easy about this strategy is finding these opportunities in the binary options market. Most binary brokers do not allow stock or option trading for the first 30 minutes of the trading day, which is where these sorts of gaps are most commonly found. However, they are available in the Forex market, although they can be more difficult to find. When there is a gap in time between trading sessions, such as what is found in the changeover from the Asian trading day to the European day, and so on, these can happen, but the gaps will not be as noticeable, nor will they be as actively attempting to close the gaps in price that may have been created.
Finally, you will want to evaluate any gaps you find in an asset’s price chart with news events. Sometimes price gaps do not close, and more often than not, it is because something has happened to warrant the sudden change. If this is the case, this strategy stops working and trader sentiment takes precedence, so beware.
Look at the Drawbacks
In addition to the drawbacks on timeframes with stocks and indices, there are a few other drawbacks to this. For one, this strategy only works if the market is actually striving to close the gap that has been created. If this doesn’t happen, the strategy will not work and your trades based upon this premise will fail. The strategy works most of the time, but not all of the time, and for this reason, this is not a perfect strategy.
Another drawback to this is that most traders do not have a thorough knowledge of candlestick charts, and this is where you will find the price gaps to be the most obvious. When there is a lot of black space between two candlesticks, particularly two candlesticks that show different price momentum (one trending up, and the other trending down), this strategy becomes so much more effective. However, those that are well versed with candlestick charts sometimes find that they are not spending enough time studying current events. These traders find that price gaps exist with a lot of ease, but when it comes time to trade them, they discover that there’s a fundamental reason or news event that gives a valid reason why the price gap should exist. These traders have the technical knowledge to trade well with this, but miss out on the important issues that are influencing price over the short term. A balance is needed in all three analysis categories.
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