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Coach's Playbook Posted by Team Topstep January 19, 2022

Day Trading Gaps

Are you familiar with the phrase, “all gaps get filled?” Well, let me tell you, that mantra has been the proverbial death blow for many a day trader. Indeed, most gaps do eventually get filled. But, on the other hand, there is also a significant number that doesn’t get filled or take a considerable amount of time to get filled.

This week, the Topstep coaches take on the question of what a gap is, what it means, how to identify them, and how to take advantage of them, as far as looking for opportunities.

Funded Trader Shoutout

There’s no doubt it can be difficult transitioning from the Trading Combine™ to a Funded Account™. But that’s what makes this funded trader shoutout so notable. On his very first day in a Funded Account, Topstep funded trader Sean Miller came charging out of the gate right into the E-Mini Nasdaq-100 futures (NQ) market to book a $1,400 profit for the day. 

Not only is this an impressive start, but it also provides a comfortable cushion for Sean to continue slowly growing his account value and eventually take a withdrawal. Keep it up!

Day Trading Gaps

First, what is a gap? Gaps are typically formed in the wake of sharp one-directional moves or during the break between trading sessions. Then, when the market reopens, there will be an apparent separation between the previous closing price and the opening price.

A gap that occurs during Regular Trading Hours (RTH) will usually happen after the release of economic data or an extreme fundamental event, such as a natural disaster. Depending on the type of gap, you will notice either a significant drop in or a steep rise in volume when an RTH gap occurs.

Breakaway Gaps & Common Gaps

Common gaps are just that; common. They can occur on any timeframe, typically without a significant increase in volume, and usually fill in a short period. 

Breakaway gaps are a bit different. These will usually appear at extreme highs and lows, when a trend reverses, or the market breaks out of a congestion area. You should see heavy volume on a breakaway gap, and it could take a long time before the market makes it back to trade through that area.

The longer the timeframe chart the gap occurs on, the more significant that area will become. We don’t like to use the words “support and resistance” a whole lot around here, but you can view long-term gaps as potential target areas or areas of importance.

When the market you’re trading approaches a long-term unfilled gap and attempts to fill it, take the time to note of how the market trades around those levels for future reference. It’s always possible that a particular market will react the same way when it reaches another long-term gap.

Trade Well!