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Gaps, Pro Versus Novice

Gaps represent times of significant supply and demand imbalance in markets. There are two main types of gaps - professional gaps and novice gaps. Professional gaps occur after a large price move in the opposite direction and tend to ignite further movement, while novice gaps occur after a move in the same direction and often lead to reversals. The document provides examples of each type of gap on a chart of the S&P 500 and recommends high probability trading strategies, such as joining a professional gap on a pullback or fading a novice gap by looking for support or resistance levels. Mastering how to identify and trade different gap types can provide traders an edge.

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438 views2 pages

Gaps, Pro Versus Novice

Gaps represent times of significant supply and demand imbalance in markets. There are two main types of gaps - professional gaps and novice gaps. Professional gaps occur after a large price move in the opposite direction and tend to ignite further movement, while novice gaps occur after a move in the same direction and often lead to reversals. The document provides examples of each type of gap on a chart of the S&P 500 and recommends high probability trading strategies, such as joining a professional gap on a pullback or fading a novice gap by looking for support or resistance levels. Mastering how to identify and trade different gap types can provide traders an edge.

Uploaded by

rtkiyous2947
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Gaps, Pro versus Novice

Price gaps in markets are events that successful traders understand


very well. This is because when you really understand gaps - why
they occur, and how to trade them - you realize how powerful and
opportunistic these events really are. Gaps represent the ultimate
supply and demand imbalance, which is key when attempting to
identify market turning points. Whether we are talking about Stocks,
Futures, Forex, or Options, the logic and rules for gaps don’t change.
Gaps occur when there is a supply and demand imbalance.
Specifically, when there is more demand than supply at the prior day’s
closing price, the market will gap higher the following day. When
supply exceeds demand at the prior day’s closing price, the market
will gap down the following day. Let’s take gaps a little bit deeper and
dive into part of a lesson from the Extended Learning Track (XLT).
While we have a big lesson on gaps in the XLT that covers all the
significant gap opportunities, today I will share one set of gaps that
you may want to pay attention to, Professional Gaps versus Novice
Gaps. Later in this piece, I will explain where these gaps get their
names from. For now, here are the definitions and proper actions.
Professional Gap: A gap that occurs after a move in price, in the
opposite direction of that move. These gaps occur at the beginning of
moves and ignite them.
Professional Gap High Probability Action: Join the gap on a
pullback in price to the origin of the gap so long as the opportunity has
a significant profit margin.
Novice Gap: A gap that occurs after a move in price, in the direction
of that move. These gaps tend to be found at the end of moves and
lead to reversals.
Novice Gap High Probability Action: Fade the gap when price
reaches a support or resistance level so long as there is a significant
profit margin. S&P
Figure 1: S&P Chart
Above is a chart of the S&P. Identified by the grey shaded areas are a
Professional Gap and a Novice Gap. As you can see, the Pro Gap is
after a big rally in price, in the opposite direction of that rally. This gap
ignites the move lower in price. After the gap open to the downside,
often price will quickly rally and fill the gap and then proceed lower.
The astute trader can look to sell short near the origin of the gap as
that is the low risk / higher reward way to join that gap down in price.
Lower on the chart, we have the Novice Gap. This one is a gap down
in price, after a decline in price. We call this a novice gap because
someone is selling AFTER a decline in price and DURING a gap
down. This combination is a very novice move and typically leads to
losses for the seller (and gains for the buyer). The proper action on a
novice gap down is to first identify the nearest support level and look
to fade this gap down with a long position. This is the low risk / higher
reward trading idea with the presence of a novice gap.
There are other types of gaps to consider when trading the open of a
market. Typically, it is at the open of a market that prices are at levels
where supply and demand are most out of balance. I witnessed and
facilitated this for a long time handling institutional order flow at the
Chicago Mercantile Exchange. Translating these areas of imbalance
onto a price chart helps attain an edge over your competition. Only
put your money at risk when the odds are stacked in your favor and
the risk is low, which means identifying novice action in a market and
taking the other side of the novice’s trade.
Lastly, trading the open of a market is not for a beginner or novice
trader. However, once you have attained the ability to quantify
demand and supply in any market and any time frame, you are likely
to find trading the open a very opportunistic time to trade.

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