There is a popular saying in trading, “Amateurs open the market, but professionals close it.” That saying refers to the massive amounts of orders that brokerages have to fill at the open as a result of amateur traders and investors flooding them with buys and sells from news they heard in the afternoon or evening. Typically the professionals and institutions will wait for the day’s trend to develop before working out their purchase or sales price in the afternoon. However, fueled by fear and/or greed, the novice jumps in as soon as they can when the market opens or even in the pre-open.

When there is an influx of orders, the brokers will want to fill them as soon as they can since they earn their commission from the order flow. But this rush to fill the orders can exhaust the momentum and cause additional swings in the morning. As an example, let’s suppose the market looks bullish. You hear good news about a company and want to buy their stock. You must remember that you are not the only person who has heard this news nor are you the only person submitting a buy order.

In the pre-open, the exchanges look at all of the buy orders and sell orders being received and try to match them at an opening price that would best fill the greatest number of orders for the customers. This is great except, if the majority of buy orders have been satisfied in the pre-open, then how will the price rise when the markets open? Think about it. If everyone who wanted to buy just got into their stock, then there will not be the demand needed to push prices higher at the open.

Often, the large demand for stock will cause the price to gap up on the open into a level where many sellers are waiting. This area is called resistance. It is an area where prices had collapsed in the past due to an imbalance of buyers and sellers. If the demand is exhausted in this area, could the price go anywhere but down? This offers a great opportunity for an intraday trader who can identify the levels properly.

India Markets

Gaps are a normal part of trading. Traders can view these gaps as a great inconvenience or an excellent opportunity. The key is to see what the price action is telling you after it gaps. An interesting thing to see is whether prices were able to gap beyond the prior day’s price action. When I speak of the prior day’s price action, I am referring to the movement of price between the prior day’s high price and the prior day’s low price. If prices gap but do not open above the prior high or below the prior low, then the gap is called an inside gap and is likely to fill during that day.

India Markets

As an intraday trader, I can identify stocks that are exhibiting this pattern and plan trades to take advantage of the gap filling as long as the Nifty is also confirming the movement. This could also have huge implications for swing traders as a gap that occurs opposite to their position may be able to be ignored thus preventing panic and an early exit.

Should price gap above the prior high or below the prior low, then the gap is considered to be an outside gap. Outside gaps also offer interesting trading opportunities. They tend not to fill in the day but will change direction at the prior high or prior low. If a stock does gap above the prior day’s high, it is an outside gap and will likely only fill until it reaches the prior high which will act as support. If the markets are bullish, then expect a bounce here for a long.

India Markets

If the stock gaps down and tries to fill the gap, often the prior low will act as resistance and cause the stock to drop from that point thus identifying a shorting opportunity.

India Markets

There are always exceptions to these guidelines on gaps and traders should exercise caution and discretion when identifying trading opportunities surrounding gaps. Look at the broad market and also larger trends for guidance and above all, place protective stops to manage your trades. Trade safe and trade well!

Learn to Trade Now


Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.

Editors’ Picks

EUR/USD rises further toward 1.1200, focus shifts to ECB-speak

EUR/USD rises further toward 1.1200, focus shifts to ECB-speak

EUR/USD stays strongly bid toward 1.1200 in the European session on Thursday. The pair capitalizes on a renewed US Dollar retreat and an upbeat mood. Traders digest the Fed's dovish outlook, bracing for ECB-speak for fresh trading incentives. US data are also eyed. 

EUR/USD News
GBP/USD resumes upside toward 1.3300 ahead of BoE rate call

GBP/USD resumes upside toward 1.3300 ahead of BoE rate call

The GBP/USD gains traction and approaches 1.3300 in European trading on Thursday, having found buyers near 1.3150. A broad US Dollar pullback and a rebound in risk sentiment offer support to the pair ahead of the BoE policy announcements. 

GBP/USD News
USD.JPY reverses sharply from 144.00, as US Dollar recovery fizzles

USD.JPY reverses sharply from 144.00, as US Dollar recovery fizzles

USD/JPY is attacking 143.00 in Thursday's Asian session, reversing sharply from 144.00. The pair pares back gains in tandem with the US Dollar, as the latter's post-Fed recovery falters due to a rebound in risk sentiment. The focus is next on the US data due later today and Friday's BoJ decision. 

USD/JPY News

Editors’ Picks

GBP/USD resumes upside toward 1.3300 ahead of BoE rate call

GBP/USD resumes upside toward 1.3300 ahead of BoE rate call

The GBP/USD gains traction and approaches 1.3300 in European trading on Thursday, having found buyers near 1.3150. A broad US Dollar pullback and a rebound in risk sentiment offer support to the pair ahead of the BoE policy announcements. 

GBP/USD News
EUR/USD rises further toward 1.1200, focus shifts to ECB-speak

EUR/USD rises further toward 1.1200, focus shifts to ECB-speak

EUR/USD stays strongly bid toward 1.1200 in the European session on Thursday. The pair capitalizes on a renewed US Dollar retreat and an upbeat mood. Traders digest the Fed's dovish outlook, bracing for ECB-speak for fresh trading incentives. US data are also eyed. 

EUR/USD News
Gold price jumps back closer to all-time peak, $2,600 remains in sight amid fresh USD weakness

Gold price jumps back closer to all-time peak, $2,600 remains in sight amid fresh USD weakness

Gold price regains positive traction following the previous day's pullback from the all-time peak and builds on its steady intraday ascent heading into the European session on Thursday. 

Gold News
BoE expected to keep interest rate unchanged at 5% as price pressures persist

BoE expected to keep interest rate unchanged at 5% as price pressures persist

After a close call in August, the Bank of England’s September interest rate decision is keenly awaited for fresh cues on the bank’s future policy action and the pace of its bond sales.

Read more
Bitcoin surges to $62,000 mark after 50 bps Fed rate cut

Bitcoin surges to $62,000 mark after 50 bps Fed rate cut

Bitcoin and Ripple eye for a rally as they break and find support around their resistance barrier. Meanwhile, Ethereum demonstrates signs of recovery as it approaches a critical resistance level, indicating that an upward rally could be on the horizon if it successfully breaks through.

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