4 Rules for Trading Opening Gaps

Gaps represent big supply/demand imbalances and are a favorite set-up for more experienced traders in particular. Here are four rules for better understanding gaps and exploiting their high profit potential

Gaps in price are great because they are the picture of a strong supply and demand imbalance when you understand them. Not every gap sends the same message or represents the same opportunity, so we structure them into an understandable checklist.

Let's get back to gaps. In our classes, we keep it simple. Here are four rules to keep in mind when you have a gap:

1.A gap up in price, into supply, after a rally in price, and in the context of a downtrend, is a very high-probability shorting opportunity
2.A gap up in price, and in the context of an uptrend, is a lower-probability shorting opportunity and can actually be a buying opportunity on a pullback to demand when there is a significant profit margin above
3.A gap down in price, into demand, after a decline in price, and in the context of an uptrend, is a very high-probability buying opportunity
4.A gap down in price, and in the context of a downtrend, is a lower-probability buying opportunity and may in some cases be a shorting opportunity after a rally into supply when there is a significant profit margin below

These basic thoughts will likely give you an edge over those who are on the other side of your trades, and having that edge is the key to trading anything.