Why do I make gaps such an important part of the XLT program? Simple, gaps are the most obvious way to spot a novice market speculator which is exactly who you want on the other side of your trade. Remember, if you can’t spot the novice trader who buys at retail prices and sells at wholesale prices in a market, the novice trader is probably you. Just like the game of poker, if you sit down at the table and can’t figure out quickly who will pay the table that night, it is likely you. “Novice gaps” are the ultimate picture of novice greed or fear in the market.
Gaps in price are great because they are both the picture of a strong supply and demand imbalance and the picture of confusion, greed, and fear when you understand them. Not every gap sends the same message or represents the same opportunity so we structure them into an understandable check list. Once this is done, we can use this information to spot the picture of very novice buying or selling and be there to take the low risk, high reward, and high probability trade.
At Online Trading Academy, we cover two types of gaps specifically, Novice and Pro gaps. Both offer strong opportunities when present in a market so let’s go over them. The illustration above shows these two types of gaps, let’s go over them in more detail.
The Novice Gap
- The Setup:
The novice gap is a gap in price, after a move in price, in the same direction as that move.
- The Logic:
The buyer of a novice gap up (buying after a strong period of buying) or a the seller of a novice gap down (selling after a strong period of selling) is considered novice because only a novice trader would take that very low probability action.
- The Entry:
When the novice gap is into a fresh demand or supply zone, we enter the position in the opposite direction of the gap (fade the gap).
The Pro Gap
- The Setup:
The pro gap is a gap in price, after a move in price, in the opposite direction of that move.
- The Logic:
Just as the novice gap clearly shows the foot prints of novice trading action, the pro gap equally conveys the message of professional buying or selling. Banks or institutions have buying and selling power to cause a pro gap, not retail traders.
- The Entry:
The entry for this setup is on the first retracement to the origin of the gap, in the same direction of the gap.
Mastermind Community Market Screener: Novice Gap
Above is an example of a Novice Gap down. This trading opportunity was found by our proprietary Market Screener, a service inside the Mastermind Community. First, notice the demand zone (yellow box and blue lines near bottom of chart). Here, banks are buying this market and in a big way. The buy orders are so big that the market runs out of sellers at that level causing price to originally rally strong from that demand zone. This is the picture of a significant supply and demand imbalance. Next, notice the circled area to the right where price gaps down to. This is a novice gap down because it is a gap down in price, after a decline in price, and into a fresh demand zone. This setup offers us a very high probability buying opportunity. What is really happening is novice sellers are selling right at a price level where banks are buying and we know who wins that battle. Our goal in trading is not to create certainty because that never exists. Our goal is to become masters at objectively assessing the odds which means objectively quantifying real supply and demand and who is really buying and selling and that is what the Market Screener and our rules tell us.
Let’s get back to gaps… At Online Trading Academy we keep it simple; here are some more thoughts to keep in mind when you have a gap:
- A gap up in price, into supply, after a rally in price, and in the context of a larger time frame down trend is a VERY high odds shorting opportunity.
- A gap up in price, in the context of an uptrend is a lower odds shorting opportunity and actually can be a buying opportunity on a pullback to demand when there is a significant profit zone above.
- A gap down in price, into demand, after a decline in price, and in the context of a larger time frame uptrend is a VERY high odds buying opportunity.
- A gap down in price, in the context of a downtrend is a lower odds buying opportunity and may in some cases be a shorting opportunity after a rally into supply when there is a significant profit zone below.
While there is much more on gaps than I can write about in a short piece such as this, keep in mind that the picture of the ultimate supply and demand imbalance is a gap. When you are ready to take a trade, simply ask yourself, “Who is on the other side of my trade?” and make sure you are trading with someone who is making a big mistake according to the laws of supply and demand, motion into mass, or whatever version of this basic governing dynamic you want to call it. Instead of looking at red and green candles on a chart and following a conventional Technical Analysis book, start looking a little deeper and begin to understand the order flow that’s going on behind the scenes that is responsible for the creation of those candles. These basic thoughts will likely give you an edge over those who focus on all the complex illusion in the financial industry and having that edge is the key to trading anything. If you are tired of transferring your account into someone else’s, stop looking at the market the same way everyone else does.
Hope this was helpful. Have a great day.
Sam Seiden – firstname.lastname@example.org