The Basics of Gap Trading For Crypto Newbies

In crypto trading, there are eight (8) trading styles including Gap trading.  Traders believe gap trading is a simple and strict trading style. Gaps are the spaces that prompt in the chart when there’s a change in the stock price. Gaps are unpredictable and can occur at opening and closing prices on the trading chart. Let’s briefly examine this, its categories, causes, and how to trade it.

What Is Gap Trading?

A gap is an area with no trading activity on the chart. It occurs quickly without giving notice, as such, you have to be sharp as a trader to trade the gaps. Gap trading occurs when you see stocks with a price gap from the preceding close and identify the trading range. When you rise above the range signals, it means a buy, but when it falls below, it means a short.

The Four Categories of Gaps

Before you trade the gaps, you should know its four categories for effective trading.

• Common Gaps: This category is part of the trading chart where there’s a price gap.

• Exhaustion Gaps: Exhaustion gaps occur at the end of a price pattern and signifies an attempt to hit new highs or lows.

• Breakaway Gaps: Here, the gap at the end of a price pattern means the beginning of a new trend.
• Runaway Gaps: This category is otherwise known as continuation gaps by traders and occurs in the middle of a price pattern, showing buyers or sellers a common belief in the future direction of the stock.

Causes of Gaps

Some factors cause gaps. However, traders have associated the causes of gaps with technical breaches or unexpected news. Technical gaps occur at the break of a prior high/low or other technical resistance. While fundamental gaps occur if the Federal Reserve (Fed) offers a speech that influence interest rate expectations or a company beats earning estimates by a wide margin.

How To Trade Gap

Trading experts have identified three (3) ways to trade the gaps. These trading strategies show how to gap trade profitably when they occur.

• Gap Fading

Gap fading is a trading strategy where the trader fills the gap on the trading day.

• Gap Prediction

In this trading strategy, the trader predicts a potential gap on the next trading day due to prior knowledge of a company and its operations due to technical or fundamental factors.

• Indicators Usage

In this strategy, traders can use trading tools like RSI and Exponential Moving Average to discern price points and trading decisions.