How to trade using Inside Gap Trading Strategy?

Today we are going to learn about Inside Gap Trading Strategy

In the last 3 episode, we have discussed about gaps on the direction of the trend. (i.e) Price movement and price gaps are in the same direction – up trend and gap up. In this episode, we are going to learn about inside gap trading strategy.

There are 2 types of inside gaps:

·         Price gaps up in downtrend

·         Price gaps down in uptrend

For our example in this episode, let’s take price gapping up in a downtrend.

Different parts of Inside Gap Trading Strategy

There are three major parts which forms this pattern.

1.      Prior downtrend – The market should already be in an downtrend, price should have dropped big the previous day

2.      Gap up– Price gaps up the next day well above the low and closing price of the previous day.

3.      Pullback – this is the critical point of this strategy and has 2 outcomes.

a.      If the stock gaps up and then sell off (which is pullback to the downside) and remains below the high of the day, it’s possible that the stock has reached its high of the day.

b.      However, if a stock gaps up and pulls back to the downside, but then rallies to break above its opening price, the up move is probably not a trap and the stock should make new intraday highs – this is no trade zone for us

Importance of volume:

• It is important to watch the volume carefully when determining if a gap is valid. If the stock gap up high and the volume also high and also the price remains above its opening price after the early morning pullback, it is an excellent sign that the stock has further to go on the upside.

• If high volume appear after a gap up and the stock immediately comes under selling pressure and price remains below the high of the day, chances are that this volume was a seller

Entry, Target and SL

You can enter into the trade if the price remains below its opening price 30 minutes after market opens and shows signs of selling pressure.

SL for this strategy is simple, we can use high of the day as our SL.

The target for this strategy should be calculated using SL, we should target at least 2X of our SL.

For more details and examples, checkout the video: