High Profits Using Gaps

Combining Candlestick Signals and Gaps

“He who fears something gives it power over him.”

Gaps occurring at different locations in a trend have different meanings. Tak­ing advantage of what they reveal becomes highly profitable. Dissecting the implications of a gap/window makes its appearance easy to understand. Where a gap occurs is important. The ramification they reveal in a chart pattern is an important aspect to Japanese Candlestick analysis. Some traders make a living trading strictly from gap trading.

Gaps (ku) are called windows (Mado) in Japanese Candlestick analysis. A gap or window is one of the most misunderstood technical messages. It is usually advised by a good percentage of investment advisors not to buy after a gap. The explanation being that it is too dangerous to predict what will happen next. That advice usually comes from somebody that does not know how to use gaps successfully. Gaps reveal powerful high profit trades. Candlestick signals, correlated with the appearance of a gap, provide high-probability profitable trade set-ups. The unique built-in forces, encompassed in the candlestick sig­nals, and the strength of a move revealed by the existence of a gap produce powerful trading factors. The knowledge of what this combination of signals reveal will produce consistent and strong profits.

These are not “hidden” secret signals or newly discovered formulas that are just now being exposed to the investment world. These are a combination of widely known, but little used, investment techniques. Candlestick signals obviously have a statistical basis to them or they would not still be in existence after many centuries. Gaps have very powerful implications. Combining the information of these two elements produces investment strategies that very few investors take the time to exploit.

Consider what a window or gap represents, in a rising market, it illus­trates prices opening higher than any of the previous days trading range. What does this mean in reality? During the non-market hours, something made own­ing a stock, or any other trading entity, tremendously desirable. So desirable that the order imbalance opens the price well above the prior day’s body as well as the high of the previous days trading range. As seen in Figure 4-1 A, note the space between the high of the previous day and the low of the follow­ing day.

Witnessing a gap or window at the beginning of a new trend produces profit­able opportunities. Gaps formed at the beginning of the trend reveal the buyers have stepped in with a great amount of zeal. A common scenario is witnessing a prolonged downtrend. A Candlestick signal appears; a Doji, Harami, Ham­mer, or any other signal that would indicate that the investor sentiment is changing. What is required to verify a candlestick reversal signal at the bot­tom? More buying the next day! A bullish candle indicates a reversal has oc­curred. A “gap up” bullish candle indicates that a reversal has occurred with extraordinary force.

Many investors are apprehensive about buying a stock that has popped up from the previous days close. A risky situation! The hesitancy is caused by the percentage move. When most investors are happy with a 10% return annually it is hard for an investor to commit funds to a position that has moved 12% in one day. Understanding what that gap up represents eliminates fear.