Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

Trading the Gap Up and Gap Down – Part 3

1 min read

In the last episode we learnt about sentimental gaps and how it got faded by going against the retail traders sentiment and in this tutorial we will look into the professional gaps which remains unfilled for months and sometimes years!

To understand whether a gap is sentimental gap or a professional trading gap we need to understand the thumb rule of gap trading.

1)In a trending market some of the gaps are expected left open for weeks or months and sometimes even years. (Professional Gaps)
2)In a side ways market gaps are expected to fade withing couple of days (Sentimental Gaps)
3)Bigger the gap larger the probability that it will fill on the same day.

When the markets are trending the price movement is driven and mostly dominated by long term players, Institutional Players and when the markets are moving in a sideways market the price movement is largely driven by global sentiment, retail trader sentiment and so completely dominated by shorter term players

Gap Zones

 

Lets looks into the professional gaps Created in Nifty Futures. Currently Nifty Futures is trading around 7978 and the recent downslide in nifty futures during August 2015 has left two gaps above the current nifty future price open. One at 8352 Zone and the another at 8222 zone. Similarly when the markets was trending it left a small gap at the downside with respect to current nifty future price at 7052 during the pre election period May 2014(left open for more than a year). The Gap Zones are indicated in the above charts with red dotted lines.

Nifty Weekly Sentiment
Weekly Sentiment

Now the challenge is one cannot predict which gaps will be filled first (Upside or the Downside Gap) and when it will be filled. Whenever we are not able to predict the markets it is good to follow strategies to control your risk while trading. One way is we can use weekly sentimental analysis to target those gaps. When the sentiment is positive we are biased towards the upside gap to get filled and when the weekly sentiment turns negative our bias turn towards the downside gaps and there by having the ability to shift our trading strategy dynamically to trade towards the gap. At this point of time while writing both Nifty Daily and Weekly Sentiment holds positive – means the current bias is positive but when there is a reversal in sentiment i.e the weekly sentiment goes negative the bias automatically targets the downside gap.

In the next tutorial we will discuss more about how to play with gaps using market profile

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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