Price can Gap UP or Gap DOWN

Gaps

A gap is an empty space between two candlesticks where the price either rises or falls from the previous candle close with no trading occurring in between.

They also represent big supply and demand imbalances where either supply exceeds demand or demand exceeds supply.

When trading supply and demand, gaps are great indicators of market imbalance. In general, levels with gaps are considered to be the strongest levels to trade because they are high probability zones.

Price can gap up or gap down:

A gap up is a gap that occurs when the lowest price of a candle is above the highest level of the previous candle.

A gap down occurs when the highest price of a candle is below the lowest price of the previous candle.

Gaps are common when a major economic event causes market fundamentals to change during the weekends when the market is closed. They are usually found at the open of the market on Sundays.

A gap is considered closed or filled when the price comes back and fills the entire range of the gap. Once price fills the gap, it reverts to the direction of the prevailing trend.

To draw your supply and demand zones with gaps, we always draw the proximal and the distal lines at the origin of the gap and not after it.

Professional Gaps

A professional gap is a gap that occurs in the opposite direction of the previous trend. The professional gaps are formed at the beginning of the moves and extended it.

On this chart, we have a professional gap formed in the opposite direction of the prevailing trend (uptrend). Price retraces back up to test the supply zone and fills the gap to continue moving down.

This kind of gap signals a continuation in the direction of the gap created by professional traders.

Novice Gaps

A novice gap is a gap that occurs in the direction of the prevailing trend. A novice gap tends to form at the end of a move signaling a potential trend reversal.

The chart below shows an example of a novice gap created at the end of an uptrend. Novice traders use conventional technical analysis to trade breakouts using support and resistance.

On this chart, the gap happened right after the breakout of the resistance line. This gives a bullish signal to buy at the breakout.

They are buying high instead of buying low and they do it right at the supply zone where professional traders are selling. Price tests the supply zone and the trend reverses to the downside taking all their stops out.

As a rule of thumb, when we have a novice gap, we trade against the novice traders.

It is important to understand these two types of gaps when trading supply and demand because when they happen, they give us an important piece of information as to where the market is willing to go next.