Gaps are nothing but lack of trading during the market open caused by either by a day traders or professional institutional traders/investors. There is a old saying that ‘all the Gaps will fill’. It is often observed that wider the gap introduces more volatility in the markets. And gaps are created because of extreme sentiments among traders/investors (Macro Events, Earning announcements, earnings expectations) which make them to bring flood of orders during the market open. There are two kinds of gaps you can observe in the market.
1)Markets Gap Up/Down and Still open within previous day high-low range
2)Markets Gap Up/Down and open outside previous days high-low range
Traders interest is mainly on the gaps which is outside the previous days high-low range. Such gaps will fade sooner or later. If the gaps are create by amateur traders sooner it will fade either on the same day or less than a week/month and trading activity happens in those zones. However gaps created by professional traders will take more time to fade out and rarely fills in case of stocks or it take more time (more than a month or even a year or two) to fade such gaps. Identifying whether the gaps are created by Amateur or Professionals will give you a trading opportunity. One should not trade against professional gaps it is better to join them and ride the trend in the direction of gap.
Post the Recent Crash in Indian market with increasing India-VIX would have created more outside gaps in indices & stocks. Currently three main gaps remains open in both nifty futures and bank nifty futures. These gaps are created because of the global market sentiments like FED rate policy announcements, Chinese market crash, Yuan devaluations and extreme Global market sentiments.
In the next tutorial we will analyze how to identity whether the gap is created by Professional Institutional traders or Amateur traders