Gaps for the Swing Trader.

A breakout from a trading range offers trading opportunities to the Swing Trader. Often, such breakouts begin with a gap. Traders should treat gaps with respect. Gaps provide sufficient power to overcome the resistance provided by a trading range. A breakout gap suggests buying power. There are traders who are willing to pay more to buy. This should be good news for the bulls, because these traders are probably looking for higher levels before they take profits. Enthusiastic buying draws the attention of traders that leads to further buying and price expansion.

BUT,  the Swing Trader must remain cautious if the move lacks heavy volume. Often, the gap fills quickly taking traders into a bull trap. Often, average breakout volume is accompanied by a quick filling of the gap. Traders are confronted with the question: Is this a pullback or has the breakout failed? Since we cannot look into the future, we have to assume that the breakout remains valid so far prices remain above the mid point of the trading range which triggered the breakout.

Practical Application:

The Nifty moved inside a trading range 5200 – 5300. It then broke out of this range on Wednesday, April 18, with a gap. By the close of trading the gap was almost filled. Yet, prices did remain above the trading range resistance of 5300, and much higher than our make or break level of 5250. On Thursday (today), we have to assume that the trend remains up. Prices consolidated before closing at 5340, the top of the day’s range. On Friday, we can move our stop to 5300 since this level has held for two days. We continue to have a bullish bias so far the Nifty remains above 5250.