Day Trading Gaps and Windows
Okay, so in this episode we’re going to talk about gaps and windows on both the daily chart and the intraday chart.
This is yet another episode in this multi-part series on technical analysis and specifically how to read stock charts for day trading. But again, not exclusive to day trading. If you are a short-term investor or swing trading, you can certainly apply gaps and windows to those strategies as we are going to talk a little bit about daily charts.
Now, a reminder as always, these levels are critical and work well because many traders respect this language of technical analysis. This is why you are learning this language because there are very clear buy and sell signals on technical analysis within the chart. And if you’re missing them, you’re both missing opportunities and potentially positioning yourself to jump right into a sell signal without realizing it, and that could be a quick and unnecessary loss.
So let’s first talk about how the gap is formed. So gaps are very common on daily charts of stocks and the way they form, and I’ll switch to the whiteboard here for a day of stock trading. I’ll just draw like a bunch of days here. Let’s just pretend these are regular candles. And then the next day the stock has terrible news and it opens here. So the distance on the chart is from here to here.
Now, technically each of these levels is a gap if it opens higher than the previous day. So a gap is whether I am opening higher or lower than the previous day. We can have stocks that gap up, we can have stocks that gap down, but what happens on the daily chart during the gap, and you can see, this is an example of a chart with a blue highlight in the gap. , gap down, you have such a big space.
And the way I look at a gap like this is that it’s an area where you literally have no resistance and you have no support because it breaks down the whole area. So we have a strategy called gap fill. Now the gap filling strategy is when we see a stock that is down and then starts to come back here, we look at this potential area from here to here. This is the way to fill the gap here. So as it starts to break into the gap, it’s not going to be a technical level resistance here until this area, unless you have a level like your 200 moving average that’s going to cross over in the middle. And if you have that, that’s your first level resistance at 200. If you can get past that, you’ve got space up to here and you’ve got a free spot.
So these are the gaps on the daily chart. Gaps are extremely common. What’s a little different now is when we have something called Windows. There’s a window on the daily chart when you have, let’s see, so we’ll do this. So we’ll do a couple of candles here and then a couple of candles. We’ll have one coming down and then two more here. OK, so now if this stock starts to move back up there’s not a gap right here, but there’s a window from here to here.
So this window is formed by a very long candle. So once you are in this field, you have no resistance and no support. I say that, but I hesitate for a second because it’s possible that if you look at, this is a daily chart, if you look at this candle at five minutes intraday, it’s possible that there’s a very candle within this candle that’s turning. A high level of support maybe halfway before that.
So now we come back to the daily chart, it looks like we have room all the way up to this level. But if you look at this at the five-minute level, on the five-minute time frame, you can see that we have potential resistance here. It’s also possible that just like the other example, we’ll have a moving average problem in this area, something like this, that we’ll run into a moving average, which will create resistance.
So let’s go back to our chart here because on this example you can see how even though we have a big gap, we have a 200 moving average here of 6.52, and we have another moving average here, another one here, and another one here. Another one. So this ends up creating resistance on the chart and it actually ends up creating it so it’s not really as great as the chart. Even though you have a gap, it’s not that great in the charts.
This is another example of a chart that has a gap. It opened high. And the gap I draw is the actual space where there was never any price action. Some people draw close to the open, but I wouldn’t do that because you have the low and you have the high here. And so for me, this blue area is the real distance. So if this stock starts to come down, we’ll see if it breaks this low, it has no support down here, which gives you a little bit of a gap area where you can do a little bit of a free pull. Stocks can fall very quickly. Or if we are trading on the long side, we are looking at stocks where it comes back from here, for example, if it can go above this level, we have a gap fill up to here, which means the stock is very Can only move quickly.
So when you watch this multi-part episode or multi-part series on technical analysis you already know gaps and windows with what you already know, you already know about upswings and downswings, and horizontal support and resistance lines. And you certainly already have an understanding of multi-candlestick patterns, such as the ABC pattern, flat top breakout, or bull flag. So when we start to combine all these different elements into technical analysis, only then can we start to form a really strong bias on a stock. The reasons we like it and we are bullish are the reasons we don’t like it.
And again, a reminder, that this type of analysis is really only valid on stocks that are experiencing high levels of relative volume, very high relative volume. Usually the result of breaking news. Usually a stock that is really popular, is one of the leading profit makers on the day you are trading. These are the stocks that will respond most clearly to these significant levels.
A stock with low relative volume will not actually trade very clearly around these levels. It might not even fit into the gap at all. It may come to that and then fade away. It doesn’t really have the momentum behind it to enter this tier. So you see, “Oh, we have gap fill potential,” but if you’re applying that kind of analysis to the wrong kind of stocks, that potential might not be realized.
So let’s go back to our chart here and look at a few more examples. So this is an example of a window. So here the window goes all the way from 8.77 to 19.50. So that’s a pretty big window. But as I said, it’s possible that at some point during the day during this candle, it got a lot of support around 12.50 or something like that before it sold off. Then as this comes back, we can say, “We may have a problem around 12.50.”
Now the second line that I drew at 8.77, this is below the area that is the window, here is below the window. So you can look and say, “Oh, is this going to be resistance?” And that could be because you come into either a gap fill or a window, you can have some resistance there because traders who may be from lower levels will take profits before taking the risk that it hits that level and declines. is, right?
So let’s look at another example here. This is a stock that is very undersold, and has a number of gaps and windows as it comes back. However, since this is the problem with our moving averages here, it really doesn’t seem to me to be the type of stock that is likely to open big. You probably have traders that are still underwater from this last move here. And so as you come back, you’ll probably run into a resistance level because some of those traders are selling their positions.
So just for example, if you were someone who bought 10,000 shares at six and then it dropped to two, you would have added another 20,000 shares at two to bring your average price below $4. So if it comes back to four, you can have an order to sell the whole thing breakeven, and not have to take a loss of $30, $40,000 on this trade. So as you start to come back, you’ll run into these walls, which are usually bag holders that are already out to unwind the position. So it’s not that common that you’ll have that quick parabolic move because it breaks into a gap or window, like you would on a stock that’s significantly more bullish.
This is where it’s been at this low for so long, it finally breaks and you get an almost perfect example of gap filling. Now, these are the types of charts. We have a lot of examples of this where you see gap fill examples, windows examples. But if you are doing your own technical analysis, and trying to understand these levels I want to present enough to give you an idea of what you need to start looking for.
Now, again, this is not a strategy. This only helps you learn the language of technical analysis. If you want to learn more about the strategy, below I’ll put a link in the description where you can download my Micro Pullback PDF. Right? So the Micro Pullback PDF is actually a strategy document and outlines the strategy that I trade to buy the Micro Pullback. Because we often see a stock squeeze, if we have this big window, it squeezes right here, it enters the window, pops up, and then just for a moment before it bursts higher. is withdrawn. So that micro pullback is one of my favorite ways to buy a strong stock.
And the only way I can find it is on my high of day MOMO scanners. So I see these stocks on my scanners, it tells me, boom, boom, boom, this stock is going up right now. I do my due diligence, I look at the daily potential, and I buy the first pullback for the next leg. So if you want to learn a little more about strategy check out the Micro Strategy PDF.
And if you’d like to continue watching episodes in this series on technical analysis, I’d be thrilled to have you do so. So I hope you are enjoying this. I hope you hit the thumbs up. I hope you have subscribed to the channel and you can continue to the next episode. I’ll put a link to the next one here and I’ll put a link to the most popular one here.