Automated Gap Trading Explained and Its Benefits
In the trading business, the opening gap strategy is one of those that can be termed as a high probability mechanism which can bring you quite some good fortunes if you happen to be an active day trader. An opening gap is generated when the prices have been driven significantly far from the closing price by the after-hours trading activities. After the opening of the market the following day, you will find a very huge difference between the cost as the session begins and the price at the time the day closed the day before. A gap is created between those two timelines and that generates a trading opportunity and one that has a very huge chance of success. This has been backed by research given that 70% of the time, the gaps are usually filled at that trading session.
For the buyers to fill the gap down, it is important for them to get into the market with strength and ensure that they drive the price upwards to ensure that it goes to the closing price and then goes beyond it. This is a mechanism known as fading the gap. With this, it brings about gap fill. This is the same case when it comes to filling a gap down even though the price action is determined by the sellers. Learn more about day trading, go here.
The action of fading the opening gap is one of the things that makes an ideal day trading strategy. Given the high chances of the filling of a large gap when the session is ongoing, it is possible for the traders to choose to place short or long trades. This is dependent on the gap`s direction when the prices are opened and then expect to have the prices moving favorably for them. It is during the session that the trade action occurs and will achieve a successful trade or having the stops being hit in case there is no achievement made in a gap fill. It is necessary that at all times the trader closes their position when the day ends in case none of the scenarios have been reached.
Opening gap trade is one of the ideal methods of automated trading. It has some parameters that are well known which builds its case. The opening price is the name for the trade entry while the trade exit point is referred to as the gap-fill price. Additionally, there is a lot of ease in the calculation of the stop loss position that will show up in case there is a failure to achieve the gap fill. Since these parameters are known, it is possible to program them into a trading system that is automated which will then do the trading. The system will go on and do effective money management without the need for any intervention from the trader. What this indicates is that it is possible to trade some instruments such as contracts all at the same time. In all this, you do not need to have a trader working from the computer as the session is ongoing.