What is Gap & Go Strategy?

How to Trade the Gap & Go Strategy?

Gap & Go is a straightforward and effective strategy that traders can deploy. Here’s how traders can trade it.

Identify the Gap

The first step of the Gap & Go strategy is to identify potential gaps. A gap will occur if the price of the security opens significantly higher or lower than the previous day’s closing price.

Confirm the Gap

The second step is often the most crucial step and involves confirming the gap. To confirm that the gap is suitable for the Gap & Go strategy, the trader should check how large the gap is and also track the volume. If the volume is above average, it indicates that the trend is likely to continue.

Entry and Exit

As a part of any trading strategy, setting the entry and exit points is crucial. Traders should wait out the first few minutes to identify suitable entry and exit points. In the case of a gap up, the entry should be above the high of the first few minutes and the stop-loss should be placed below the low of the first few minutes. In the case of a gap-down, the entry should be below the low of the first few minutes and the stop-loss, above the high.

Closing the Trade

After the trade has been executed, the trader should monitor the trade. If the trade is winning, the trader can trail the stop-loss and book profits if the trend stalls or reverses.

Let’s look at an example to better understand the Gap & Go strategy.

•       Stock ABC’s closing price was Rs 95.
•       After market hours, the company released a piece of positive news.
•       During pre-market, ABC’s opening price was Rs 100.
•       A trader identifies this gap-up since the opening price is significantly higher than the closing price.
•       The trader analyses the stock’s volume which is higher than the average volume, confirming the bullish momentum.
•       After the opening bell ABC opens at Rs 100. Within the first few minutes, the stock makes a high of Rs 101 and a low of Rs 99
•       The trader enters the trade once the stock crosses Rs 101. The stop-loss is placed at Rs 99.
•       The momentum continues before the stock price starts reversing.
•       The trader exits the trade either when his target is met or his trailing stop-loss is triggered.

Things to Keep in Mind While Trading the Gap & Go Strategy

A trader should keep a few key points in mind before making use of the Gap & Go strategy.

Time Sensitive

The Gap & Go strategy is effective in the initial moments after the opening of the market, making it a time-sensitive strategy. Using the considerations for this strategy to enter into a trade later in the trading session may result in a negative impact.

Heightened Volatility

Since the Gap & Go strategy is executed when the market opens, it is important to keep in mind that the market tends to be highly volatile during that period. With many traders entering and exiting positions, it is likely that the price of a security will be highly volatile.

Impact of Volume

The trading volume acts as a key factor in the effectiveness of the Gap & Go strategy. A trader should confirm that the trading volume is higher than the average volume, which indicates that the trend is likely to continue.

Risk Management

Trading the Gap & Go strategy can be risky and calls for solid risk management. A trader should set the position size according to his risk appetite. In addition, a stop loss order should be placed in order to limit losses.

Additional Tools

While trading the Gap & Go strategy, the trader should make use of additional tools such as technical indicators and price action. A trader can make use of a relative strength index (RSI) indicator to identify overbought and oversold zones. In addition, candlestick patterns and price action can be used to identify key support and resistance levels.

Conclusion

The Gap & Go strategy allows traders to capitalise on the momentum created by gaps in the market. The strategy is time-sensitive and relies significantly on the correct identification of gaps. Although the strategy has the potential to deliver substantial returns, it is necessary to have strong risk management practices in place.