Location. Location. Location.
Where the gap opens relative to the prior day's price action is the key to our gap research. We use "zones" to segment and organize historical gaps into groups that may exhibit similar trading patterns. We have tested many types of support and resistance including pivots, Fibonacci's, and moving averages and found that the prior day Open, High, Low, Close (OHLC) and price direction from open to close (up or down), work well for grouping purposes.
Gap ZonesSM work well for analyzing gap setups because they inherently incorporate:
- Nearby support and resistance
- Short term trend
- Gap size
- Trader psychology
This following map shows the 10 potential areas in which a gap may open on a given day.
To help you remember this nomenclature:
D = prior day was "down" (directionally from open to close)
U = prior day was "up"
H = above the prior day's high price
HO = below the prior high and above the prior day's open
OC = below the prior open and above the prior close
CL = below the prior close and above the prior low
L = below the prior day's low price
etc.
To view the historical win rate for each zone, assuming you faded the gap at the open and held for gap fill or until the end of the day, click here.