A runaway gap is an easy strategy to use because they are so visually striking. If you are looking at a price chart, a runaway gap—sometimes called a continuation or an acceleration gap—looks like an upward moving price, with a big and very noticeable gap moving upward in between two trading sessions. This is a bullish trading strategy, and it is perfect for short term traders, especially binary options traders that look at momentum as their primary tool. Let’s take a look at how you can use runaway gaps to fuel your trading.
How Can You Apply This Strategy
The first step in using runaway gaps is to have a reliable charting package that tracks changes in real time.
Runaway gaps occur at the beginning of a trading session. So, if you’ve been following Apple’s stock, and they closed at $105 the previous session, yet are now opening at $110, you now have a gap. If the stock had good momentum at the end of the previous session, this is likely a continuation gap (read below for more on this) and there’s a good chance that the upward momentum will continue.
This strategy requires you to trade with the overall existing trend. That means using call options. The timeframe of these should be short, but not so short as to increase the damage that random chance can do to you. So this mean five minute trades, ranging up to 15 minutes. Going more or less than this can hurt your chances of being successful. Shorter trades encourage variance, while longer trades give room for external circumstances to get in the way of your trade’s success rate.
The best case scenario for the use of runaway gaps is when you see more than one of them in close proximity to each other on the chart. This is a strong signal that you should take out call options, and keep doing so until something indicates that you should stop. As you’ve probably guessed, because this only requires looking at a chart, scenarios like this are easy to spot if you have experience with chart reading, which makes the application of this strategy extremely simple. Just don’t let simplicity take precedence over smart trading.
The Other Side of the Strategy
Perhaps the biggest strike against this strategy is that a runaway gap can look identical to an exhaustion gap, and this similarity is something that trips up many traders looking for easy money. While a runaway gap indicates that prices are now going to move more steadily in the same direction, an exhaustion gap indicates that a trend has come to an end. The best way to avoid this confusion is to confirm your trades with other indicators, preferably number-based technical indicators, so that you have a better idea of whether or not a trend will continue. Rather than using momentum indicators like MACD, you should be looking at things like strength indices. RSI is a good tool to use in conjunction with this one. You can even look at trader sentiment, if having a third look at a trade proves to be beneficial to you.
Another issue that you will face is that most binary options brokers do not allow stock trades in the first 30 minutes of the trading day. These opportunities occur most frequently with stocks, and therefore your chances of success are limited here. Momentum may still exist after this point, but odds are it will have died down a lot. You can find good uses of this strategy with commodities and currency pairs, they just happen to be much rarer. It’s still worth checking, though, as this is still a profitable strategy here when the right conditions are present.
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