How to trade gaps successfully?

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Advance nifty option trading automated excel sheet with back Testing 

In the stock market,, it is said that stock or index always goes back to fill the gap but it is not always true. Stock or index gaps down or gaps up create a void, therefore, there are no transactions that took place at that price level. In this blog, we will discuss some important points regarding the gap up or gap down strategies and the price-volume relationship to take winning trades.

1. The most important point is the larger the gap and the higher the traded volume quantity greater the chance of filling the gap.
2. If gap up or gap down is small and volume is small the gap remains unfilled.
3. If the market gaps up with the high volume it is a bullish condition only on a longer time frame but on the shorter time frame, it is a bearish condition.

Gap up testing by stock or index

1. Gap up or gap down act as a support and resistance 
2. If stock or index test the gap up or gap down with small volume it suggests that there is no more energy to pass the gap area and the gap up or gap down act as support or resistance for stock or index.

Example of gap up or gap down 

1. E.g. Let say stock ABC open with a gap from 50 to 55 on trading volume of 100 million. Stock retrace back to 52.5 with a volume of 80 million shares. stock retrace back with 20% less volume. When stock close back above 51 it gives a good buying signal.
2. Less the volume during retracement greater the accuracy of the signal.
3. The same things happen to gap down opening. If the stock opens a gap down from 55 to 45 with 100 million and retraces back to 47.5 with a volume of 80 million stock retrace back with 20 % less volume. when stock close below the 45 levels it gives a good sell signal in the stock.
4. A gap up or gap down opening in stock or index can be tested more than 1 times. Unless the volume in retracement is reduced by 20 % and close back above the opening it is a buying signal or sells signals.
5. If a trader has two stocks and stock testing the gap level the trader should take a position on the stock where there is a high reduction in volume 

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