Gap Trading: World Champion explains the BEST trading strategy in detail!

Gap trading. Every gap will be closed. This is something what other people teach the students. Trust in me, forget this. Not every gap will be closed, and I give you today the opportunity to understand what kind of gap will be closed and what kind of gap will be a breakaway gap that it is running and running and running, and you will lose all your money if you make counter trades. To close the gap. Who I am?

I'm Thomas Forward.

I'm the Champions Maker. Champions like Patrick Null, Andrei Chemintan, and others I have, yeah, prepared in the past. And you will see, this is a very good story.

All right everyone, let's get started. First, let's talk briefly about what a gap actually is. A price gap that usually occurs during after-hours trading, but there are also price gaps that happen intraday And then the big question is always, what's the story behind it? Why did this gap occur in the first place? Will this gap be filled or will it not? Now, there are two ways to get to the bottom of this. One way is to check what fundamental data is behind it. Yes, that is incredibly important. And the second is, how can I evaluate technically if this gap is substantial or not? And that's exactly what we're going to look at together now. First, I want to give you some clarity on how these gaps occur, so we have a deep understanding of it. This is a market trend. Day 1. Okay, so now comes the following day, and of course, the market opening is possible at different levels. Especially in futures trading, you almost never have the opening at the exact same level the market closed at. Now comes Day 2, and there are several possibilities. On one hand, the market might open above, or it might open within the previous day's range. Now, we have to think logically about this. What does that actually mean? Well, it simply means that this particular price range, the one in between, defines a zone that was not considered to be fair value outside of trading. That's all. It means there were factors that led market participants to trade prices higher or lower. I can tell you one thing right now: the probability that a gap like this is filled is is significantly higher than a gap up here being filled. Why is that? That's also relatively easy to determine if you've been paying attention with volume profile and such. You know that the fair prices were here, and these fair prices have their equilibrium somewhere. And since the market is within fair prices, there's simply, technically speaking, the 80% rule where the market trades within value. So there's a high probability the market fills it first unless the fundamental story is extreme, which we'll get to. The second scenario is we have a gap above the entire day, and when a gap like that occurs, it's very important to look at one thing: how is the liquidity up here? What is the volume like? And you can see that perfectly down here as well. You don't need rocket science or some complex magic for this. Just look at whether the volume is incredibly low or if it's substantial, because at the very moment they become substantial, it means that the market is accepting prices up here. And what do we have then? Then, according to my PBD logic, we have a P. And then you just have to see in which direction is the market breaking out now. And should it break out to the upside, then you know the following: Here, large market participants have most likely ensured with a substantial message, that is, news that had substance, that the markets are now priced higher and also accept this price range as fair. So please do not go here under any circumstances and simply assume for now that a gap close always happens. No, I know people give it many different names. It could be a breakaway gap, for example, But you don't have to make everything so mega complex and complicated. Instead, you can just think about it. Is this gap substantial or is it not? That was the first variant, which is very easy to determine and also has a lot of logical relevance. Let's move on to the second story. So, the second story is extremely exciting, especially for people who are also active in stocks and wonder about the gaps there, meaning the price gaps. In currencies, this also happens every now and then, and especially there, it's very important to look at what the underlying story is behind it. In commodity futures, we very often have gaps, and these gaps, you've probably seen them before, they sometimes go along in a really extreme way. Yes, then you have one day that runs, the next day again. Yes, if you go for a gap close there, then you have a real problem. So you have to know which product has which internal characteristics. Especially with commodity futures, there are also so-called limit-ups, or even to the downside as well. And that means that market participants simply have to engage in hedging very aggressively. You can forget about such markets closing such a price gap extremely quickly. Why is that? Quite simple. The hedgers, that is, those who carry out the hedging transactions, they have to hedge themselves. And very often, as we had also seen just now in gold, And in silver, something like that eventually collapses. I'll get to that in a later video and give you some very in-depth information about what happens there. But let's get back to the gaps and the story behind them. What is the story behind a gap? You always have to distinguish: is it a fundamental piece of news with substance? What do I mean by that? By that I mean, are there central bank news behind it? Are there inflationary building blocks behind it? Of course, you have to be able to determine a bit outside the box. Does it have something to do with inflation? If, for example, a large gap occurs in the DAX future now, especially over the weekend, and the market is very far away, and the story behind it has to do with inflationary building blocks, so inflation data is influenced by that, then pay close attention because this gap will likely not be closed. If it has to do with economic news that is substantial, the gap will likely not be closed. But, and this is a really cool thing if this gap has to do with political stock markets, and then I don't care about the direction, the probability is high that the market will close this gap again. That means there's this nice saying, political markets have short legs, and you can count on that. And now I'll give you a little treat to take with you. Usually it doesn't happen on the same day, but one day later. So we had day 1 here. We had day 2 here where the gap was created, and now comes day 3. And then you will see if, for example, Trump has done some nonsense again that isn't economically substantial but maybe some threats, warnings, or whatever, then you'll see often on that day the market goes and closes the gap. But how can you trade that? And I'd also like to explain that to you briefly and concisely. Look, let's assume the following. Let's just assume the market has made a gap. We're referring to this line here, and that was the following day. You surely know this and have seen it many times. When huge gaps occur, it's often the case, if they're really huge, that the market is a bit lethargic afterwards. That's because the market participants have to redefine themselves. And now you go and take the space area and look at where the balance is. You transfer that over here, and then you have a P structure. And this structure, this gap structure, is nothing more than a dynamic impulse without substance. And now you see if the market runs over this, and if it runs over that, watch out. You absolutely must check the sales volume here, and very often you will see that a lack of liquidity then arises. You can read that right down here. Now comes the break upwards, and the liquidity decreases. What does that mean? It means that many market participants no longer have any interest up there. Now the market goes back into a range and eventually goes below the range. And if it goes below the range and liquidity increases again, then you can reasonably expect that the gap will be closed. It's a very high probability and is simply a great thing from a logical standpoint. What you can also do if you're a day trader and look deeper into the markets is look at the footprint charts, and then you'll quickly see where the market has its fair level. Where does the market have its fair prices? Not just the point of control if you look at volume profile analysis, but how does it look here in terms of turnover? And we'd all like to— let's draw it together— find our short right at the top. And we've managed to do that very, very well now in gold, for example. But if you just wait a moment until the liquidity goes down and then increases again, then the probability is much higher that you can trade this gap close with a great risk-reward ratio. That's your risk, then that's your reward. So you have a high success rate and a good risk-reward ratio if you have the patience to wait for this point. If you have a gap that is substantial, like I just explained with commodities, don't do that at all. Then you can play the opposite. And I hope this has given you a lot of awareness, because this is really an approach to gap trading that is logical. It's totally simple. I know many will come now and say, but you need this, that, and that. No, supply and demand in context with the respective economic news behind a gap logic, that's the key. And if I know what a gap is, how it comes about, you should Google that. It's very important to understand that in depth as well. How does off-exchange trading even happen and what takes place there? But I hope this has helped you traders, and feel free to leave a like because I think this is pretty cool input that I'm giving you here, and I hope it helps you. Enjoy it and see you very soon. You're Tom from Trade the Traders. Bye everyone!