Gap Trading Strategy for Gold Daytraders
The price movement of gold is very different from the currency pairs. Unlike currency pairs, gold market exhibits lots of big price gap in the market very often. For the new gold day traders, this gap can cause the extreme loss in their trading capital since they don’t know how to deal with the price gap and manage their running trade.
On the contrary, professional day traders eagerly wait for the market to start with a gap since they know how to trade the gap in gold. Trading the gap in gold is extremely profitable since a lot of pips can easily be secured with very tight stop loss.
Let’s see the Chart setup used by professional gold gap traders.
Figure: Trading the price gap of gold
Professional day traders look for the oversold or overbought condition of the stochastic indicator once the market exhibits large price gaps. In the above figure, the price has gapped for 700 pips with an oversold stochastic. In the above figure, once the market starts to trade well below the gap for more than five consecutive candles, traders wait patiently for the stochastic indicator to get in the oversold region again.
The long trade is taken when the stochastic indicator hit the oversold region for the second time while trading below the price gap. In general, the price usually starts to cover the large gap once the value of stochastic indicator bounces from the oversold region. Traders put a tight stop loss just below the recent swing low while trading the gold with gap strategy.
In general, big price gap in the market often indicates the possible trend reversal. Keeping that in mind, professional daytraders use trailing stop losses once the 700 pip gap is covered. Some new traders might get into the trade right after the big gap .But this is very aggressive entry since until and unless a recent low is created in the market there is a high chance of trend continuation in the direction of the gap.