HOW TO SEEK BENEFIT FROM PRICE GAPS: THE GAP AND GO INTRADAY STRATEGY

How to seek benefit from Price Gaps: The Gap and Go Intraday Strategy

Introduction

Intraday trading is a dynamic and fast-paced endeavor where traders seek to capitalize on short-term price movements. Among the various strategies used by intraday traders, the "Gap and Go" strategy is a popular choice. This strategy involves identifying price gaps at the opening bell and trading in the direction of the gap. In this blog, we will explore the Gap and Go intraday strategy, using a real-life Indian stock example to illustrate its application and potential benefits.

Understanding the Gap and Go Intraday Strategy

The Gap and Go strategy is grounded in the observation that stocks often exhibit significant price gaps between the previous day's closing price and the current day's opening price. Traders employing this strategy aim to identify these gaps and trade in the direction of the gap, expecting the momentum to continue.

Here are the key steps involved in the Gap and Go strategy:

1. Identify the Gap: At the market open, determine if there is a price gap between the previous day's closing price and the current day's opening price. This gap can be either bullish (when the opening price is higher than the previous day's close) or bearish (when the opening price is lower).

2. Confirm the Gap: Check if the gap is significant and occurs with above-average trading volume. A substantial gap with strong volume increases the reliability of the setup.

3. Set Entry and Exit Points: Determine your entry point, typically just above the high of the first few minutes of trading if it's a bullish gap or just below the low if it's a bearish gap. Set stop-loss and take-profit levels to manage risk.

4. Monitor the Trade: Keep a close eye on the stock's price movement and volume as the trade progresses. Adjust stop-loss orders and take-profit levels as needed.

5. Execute the Trade: If the price continues in the direction of the gap, execute the trade. If the price stalls or reverses, reconsider the trade or exit with a smaller profit or manageable loss.

Real-Life Indian Stock Example: Infosys Limited (INFY)

Let's delve into a real-life example to illustrate the Gap and Go intraday strategy, using Infosys Limited (INFY), one of India's leading IT services companies.

Step 1: Identifying the Gap

At the opening bell, we notice a significant bullish gap in INFY's price. The opening price is notably higher than the previous day's closing price. This bullish gap suggests potential upward momentum.

Step 2: Confirming the Gap

We confirm that the gap is substantial and is accompanied by above-average trading volume. This increased volume supports the credibility of the setup, indicating that there is a higher likelihood of continued upward momentum.

Step 3: Setting Entry and Exit Points

- Entry Point: To enter a long (buy) position, traders typically wait for the first few minutes of trading and place an entry order just above the high of this period. This entry point allows traders to confirm that the gap momentum is likely to persist.

- Stop-loss: Set a stop-loss order just below the low of the same initial trading period. This serves as a safety net to limit potential losses if the trade goes against you.

- Take-profit: Establish a take-profit level, often at a predefined resistance level or a percentage gain that aligns with your risk-reward ratio.

Step 4: Monitoring the Trade

Once the trade is executed, closely monitor INFY's price movement and trading volume. Continuously adjust the stop-loss and take-profit levels as the trade progresses, aiming to protect profits and limit potential losses.

Step 5: Executing the Trade

If INFY's price continues to move upward, traders who followed the Gap and Go strategy would benefit from the bullish momentum. The trade can be closed at the predefined take-profit level or if the price shows signs of reversal.

Evaluating the Results

The effectiveness of the Gap and Go intraday strategy relies on various factors, including the accuracy of gap identification, strong confirmation through trading volume, and disciplined risk management. In our INFY example, if the bullish gap is accurately identified and the trade is executed effectively, traders would likely profit from the upward momentum that follows.

However, it's crucial to remember that intraday trading carries inherent risks, and losses are possible. Successful intraday traders conduct thorough research, use risk management techniques, and adapt their strategies based on market conditions.

Key Takeaways and Tips

- The Gap and Go intraday strategy capitalizes on significant price gaps at the market open.

- Confirm the gap with above-average trading volume for added reliability.

- Set clear entry, stop-loss, and take-profit levels to manage risk effectively.

- Continuously monitor the trade and be prepared to adjust your position if necessary.

- Always conduct thorough research and backtesting to refine your trading strategy.

Conclusion

Intraday trading can be a rewarding endeavor for traders who approach it with a well-defined strategy. The Gap and Go intraday strategy leverages price gaps at the market open, aiming to profit from the continuation of the gap's momentum. However, it's essential to exercise caution, conduct thorough analysis, and employ prudent risk management techniques. With practice, discipline, and a keen understanding of market dynamics, traders can harness the potential of the Gap and Go strategy in the fast-paced world of intraday trading.