Is It Possible to Profit From Gaps?

In recent months, the crypto community has begun to see an open gap trading strategy on the bitcoin futures chart on the CME exchange increasingly.

Over the past weekend, one of the largest gaps in the history of the CME Bitcoin Futures chart has been formed which has over 900 points.

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In this article we are going to figure out what are the gaps, how do they form, and what their varieties are. We will also determine the pattern of development of this strategy in the cryptomarket.

Gap is a technical analysis term which describes the difference between the time interval closing price and the next opening price. These gaps can be caused by nightly economic news, world events or simply by changes in market sentiment.

The larger the gap, the more likely the next trend will develop. Many traders use gaps as entry points, stop levels or as a measure of market strength or weakness.

Visually, the gap corresponds to the break on the price chart. Thus, if BTC closes on the futures exchange at $9200, and then opens the next session at $8200, there will be a gap of 1000 points on the chart.

This is due to the fact that cryptomarket operates 24 hours a day 7 days a week on the spot exchanges and is not traded on weekends at regulated institutions and derivatives exchanges such as — CME, CBOE, Bakkt, Grayscale and others. As a result, it is often possible to see price gaps on the charts at the opening of the trading session.

Many people do not believe that the CME Bitcoin Futures exchange plays any role in BTC pricing. And it’s no good to deny the fact that the gaps attract the price one way or another. The whole history of futures existence on BTC at CME shows it. Hence, many traders, are able to make extremely good profits if handled properly.

On the daily chart, you can see several examples of how the price closed the previous gap, even by a switch sometimes creating a large shadow of the candlestick.

Since May 2019, we have had 11 major price gaps on the daily timeframe. And all these gaps were closed sooner or later. Now we have one of the biggest gap of 9170 which is over 900 points.

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As you can see from the chart above, there was a noticeable gap few months ago, when Bitcoin zoomed up above $10,000 in just a couple of hours. Another gap that can be noticed from September is the one when CME had closed at $10.150 and the exchange had to open next Monday at over $10.400, and few days later the gap was already closed.

Based on the history, it can be assumed that when the correction occurs after such a fall, the price is more likely to reach the designated level, while closing the price gap, regardless of whether we want it or not. And for some traders, it might be a good opportunity to find a successful entry point. Such gaps on the daily chart are more likely to close, and traders have to be ready for a possible sharp price change.

On the CME’s futures chart, Bitcoin price has two major “unclosed” gaps: $11,700 — in early August, and the current gap of 900 points from $9170, which are made reference to by analysts and traders. We do not think that it can be filled in the short term. In the long turn, it is possible that the gap will become a reversal point after the price finally breaks out of the downtrend.

There are four types of gaps and they are traded in different ways. And it is very important to distinguish them on the chart for traders and investors.

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1. Measuring gap. A trading gap, also called a regular gap, occurs when an asset is traded in the normal course, but there is a small gap on a medium or low volume.

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2. Common gap. This gap, also called a breakout gap, often indicates the beginning of a large price movement. It is usually created by unexpected news of different importance, which provokes a bullish or bearish mood at the moment of their release.

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3. Breakaway gap. This gap appears when the price goes quickly in one direction. This situation is called a gap-continuation or a gap “on the break”. Such a gap occurs more often in small stocks and other financial instruments. It is caused by a rapid price movement.

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4. Exhaustion gap. This type of gap is considered as a signal that the trend is ending and that a new model or trend is likely to come. Gap Exhaustion occurs near the end of a large movement. It means that almost everyone who was interested in trading this instrument has already opened positions, and now the interest in it is disappearing. Because of this, the price can make a large gap in a small volume. A large gap on a low volume indicates that the number of those who want and can trade has decreased significantly.

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Such gaps are usually caused by random factors and do not indicate the direction of price movement. But the trading gaps tend to close within a few weeks.

There are several possible explanations of why most of the gaps are filling out. Begin with, if the leap was too optimistic or pessimistic, it could lead to a correction. Another possible reason may arise if the price movement was sharp enough and did not leave support or resistance which makes correction more probable and thus, fills the open price gap. Another reason maybe if the cryptomarket is quite volatile and has the possibility to rise by 200–400% and fall by 50–70% in just a few months, so it seems that all gaps in the charts overlap.

There are several cases when the gaps remain open and most of them closing in the short term. Based on statistics, from the last of the 100-week gaps, 95 had been filled or closed: 50 had been closed on an opening day, 30 — within the same week, and the rest were closed within a month or even six months.

Gaps occur when the asset price opens higher or lower after the last trading day. They began to appear on the chart of the largest currency after CME launched bitcoin futures contracts in late 2017. According to the charts, most of the gaps are filled during the first week, but there are cases when they remain open.

In addition, trading on gaps can be quite dangerous and you should always manage your risks. Risk management should be symmetric (1:1) because almost all of the gaps tend to be closed and should be used only as part of your overall technical analysis.

The information contains analysis and forecast of the cryptocurrency market, which are associated with high risks. This article is presented for informational purposes and should not be regarded as a recommendation to buy or sell these assets. You must conduct your own thorough research before making any investment decisions. All risks, losses and expenses associated with investing including the complete loss of the main deposit are your responsibility.

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