How to Trade Gaps on US30/US100/US500 Indexes. Best Trading Strategy Explained
- VasilyTrader
- 11 minutes ago
- 3 min read
I will teach you a simple strategy to profitably trade gaps on US Indexes (US30/US100/US500).
You will learn
why gaps occur,
when and how they are filled,
a complete gap trading plan.
Gap Opening
This gap down on US30 is called gap down opening.
The gap that formed immediately after the market opened.
Such gaps form when some significant events and news happen when the market is closed.
These gaps are aimed to price in and reassess a fair value of the market, taking into consideration the impact of this news.
In our case, this gap was formed after Trump announced on a weekend that he would impose sanctions on Nato if Denmark did not let the US take possession of Greenland.
Why Gaps are Filled
The good news is that most of the time, market makers - the institutions that create these gaps- will overestimate the real impact of such news, and the gaps will be filled shortly, meaning that the price will return to a gap-opening level.
Wait for This
This market pattern can provide a lot of profitable opportunities in Indexes trading.
You will just need one important confirmation before you open the trade.
As you can see, after this gap was formed, the market dropped significantly lower.
It happens because after the formation of the gap, the market will always seek liquidity.
After the formation of a gap down, the market will look for a significant demand zone to balance supply and demand.
And after a formation of a gap up, the price will seek a supply zone.
So once you spot a gap, make sure that you find a liquidity zone.
It should be strictly tested before you open the trade.
In our case, US30 reached a demand zone.
After reaching a liquidity zone, the market finds equilibrium and a new fair value. Supply and demand find balance, and the market starts ranging between supply and demand zones.
Strong Confirmation
After that, the market participants will wait for fresh news to come to understand whether such a sudden change in the market price was reasonable or not.
That will be a critical moment because the news may become even worse, and the market will continue moving in the same direction.
To confirm that the market will fill the gap, you will simply need to wait for a breakout of a liquidity zone.
Gap Down Trading Strategy
To trade a gap down, a supply zone should be broken.
It will signify that buyers took control, and market makers overestimated the impact of the news.
A breakout of a supply zone will be confirmed with a candle close above that.
Your entry should be after a pullback, set your buy limit order on the highest candle close level within a broken supply zone.
Take profit will be a gap opening level.
Stop loss will be below the lows.
Alternatively, a breakout of a demand zone will mean that fresh news confirms a new market trend and sentiment.
Remember This
Don't trade gap immediately after it is formed.
The best strategy to trade that is to wait for a strong confirmation.
This strategy will help you to identify the safest moment to open a trading position on US30/US100/US500 or any other major index.
