Mind the gap

Gaps are traditionally taken by new traders and some gurus, to mean that price will continue on balance, in the direction of the gap. In financial trading that is only true some of the time. Even if it is true, say 55% of the time, what does it mean for new traders? Nothing! Why? Because the only issue in profitability is how a new trader controls their acceptable loss (aka stop loss). The chart of GBPEUR shows an example of how gaps down can be potentially misleading.

Once a trader takes a view, “It’s likely to go south”, based on the gap, s/he’s made the wrong decision. So what is the right decision? (some will have asked). It’s not so much about ‘the right decision’ but about the right decision-making process that leads to the decision. The more robust decision-making is done on an analysis of the whole trend, looking at higher time frames and other key areas of horizontal or oblique support/resistance. Gaps up or down often represent market noise amongst small traders on smaller time frames, panicking or doing whatever they do. If you wanna play with the ‘big boys’, it’s a different sort of ball game.

Update: 30th March 2017 (compare with chart above).

 

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