Over the next few sessions we are going to review gaps in price and how they are affected by and affect future trading.

Gaps can occur in all time frames and in a number of varieties.

Daily gaps occur when there is significant news that causes broker pre-market bid and ask orders to be significantly above or below the previous nights close. Gaps occur on individual equities, but we will limit our discussion to broad market gaps such as the DOW (rare), SP500 (frequent) and the NDX or it's proxy the QQQ.

Intraday gaps occur in these same indices when there is significant news DURING the day, i.e. an FOMC surprise rate cut that comes out in mid session or a rumor that spreads like wildfire across the trading floor, (i.e. Osama discovered hiding in a girl's school in Alexandria Virginia).

Lets tackle the Opening Gaps:
First of all we have to understand opening and closing prices....Contrary to belief, these are not the first and last prices of the day. They are actually computed from the range of price and number of transactions occurring at various price levels during the first and last 30 seconds of the trading day. That's why many times if you watch minute by minute price charts you will see a wide variance in reported opening price from reporting services. Ultimately they all settle on a price to report.

The opening gap and the next 20-25 minutes is by far the most difficult to trade, yet the one trade that can prove to be THE most profitable trade of the day for daytraders.
This little treatise is by no means intended to teach you to trade the opening gap. I traded it quite successfully for many years, but without the proper hardware and software (physical and mental), it is too much of a roller-coaster ride for most to be able to learn to cope with.

Rather we will look at what effect these gaps can have on longer term trading when they remain unfilled for hours, days, weeks or even months and years. The reason is that these gaps act like price magnets to draw price to them when they get within the "attraction" range.

Before we leave opening gaps, just a few notes:

Most opening gaps are filled the same day...over 60% of the time
An up gap leads to higher closing prices the same day 60% of the time
A down gap leads to lower closing prices the same day 70% of the time
Traders will usually countertrade the opening gap 15 to 20 minutes into the trading day for a scalp trade. If the gap doesn't get filled in the first half hour, then most of the time the market will close in the direction of the gap opening on the day.

NEXT? Types of gaps and what causes them....

:: Henry Ford ::