Trading Mistakes: what are gaps and why are they important?

(Video summary)

The truth about trading gaps

In this video about trading mistakes, senior market analyst Axel Rudolf sits down with IGTV's Angeline Ong to explain the common error of assuming that gaps in trading will always close.

He uses the example of cotton to illustrate this concept. He points out two gaps on the chart, where the first gap was indeed filled, but the second gap remained open. Axel explains that not all gaps get closed, as some indicate an end to a movement rather than a continuation.

Exhaustion gaps, measuring gaps, and breakaway gaps

To better understand these gaps, Axel differentiates between three types: exhaustion gaps, measuring gaps, and breakaway gaps. Exhaustion gaps occur in the middle of a movement and suggest trend exhaustion. On the other hand, breakaway gaps typically happen at the end of a downward trend when the market breaks away into new territories.

Axel cautions traders against assuming that all gaps will eventually close by using the example of an unfilled gap in November 2022 that still remained open in June 2023. This demonstrates the danger in assuming that every gap will be closed.

To successfully trade gaps, traders must first correctly identify the type of gap they are dealing with, whether it is an exhaustion, measuring, or breakaway gap. However, determining the type of gap is not always easy. Axel suggests that if there is a fast upward movement followed by a decrease in volatility, it is likely an exhaustion gap. To confirm the type of gap, traders can rely on other indicators such as oscillators, relative strength index (RSI), stochastic indicators, moving average convergence/divergence (MACD), or wave theory.

Axel concludes by acknowledging that correctly identifying and trading gaps requires practice and experience. Traders must learn to interpret various indicators to make informed decisions. So, if you're new to trading, it's important to gather experience and start learning how to interpret different indicators to trade gaps successfully.