How to trade using Runaway Gap Trading Strategy?
Today we are going to learn about Runaway Gap Trading Strategy
Different parts of Runaway Gap Trading Strategy
The Runaway gap means a gap formation in the middle of a trend. Consider a stock is in uptrend already and in the middle of an uptrend, price gap ups. This kind of gap is called Runaway gap. This is a sign of trend continuation. This type of gaps will get filled soon of it is created.
There are three major parts which forms this pattern.
1. Prior uptrend – The market was on uptrend the previous day. Market is already trending
2. Gap up & drop – Price gaps up the next day and after 2-3 candles, price starts dropping towards previous day’s closing price, filling the gap created earlier in the day.
3. Reversal candlestick pattern near previous day’s closing price – Price continue to drop till the previous day’s closing price and Price forms Reversal candlestick pattern near previous day’s closing price. This is the signal for price reversal to the upside. Note, in this case, price may not close the gap fully.
To put it simple, after the move has been underway for a while, somewhere around the middle of the move, prices will gap, this gap called the runaway gap. In an uptrend, it’s a sign of continuation of trend; in a downtrend, a sign of continuation of the trend. Price will fill the gap and resume it’s original trend.
Importance of volume:
As I always say, the volume is most important thing you need to check for in any technical breakout pattern. This is applicable for gaps as well. It will be considered as double confirmation if the volume is thin while the price drops and volume shoots up when the price forms reversal candlestick pattern.
Entry, Target and SL
You can enter into the trade once the price pullback to the previous day’s closing price and Price forms Reversal candlestick pattern near previous day’s closing price.
When it comes to this strategy, we will have wide SL. So in this case, we need look for basing candles near previous day’s closing price and place our SL just below the basing area.
The target for this strategy is simple – use high of the day as your first target and 2x of that as 2nd target
For more details and examples, checkout the video: