Technical Analysis of Gaps:Identifying Profitable Gaps for Trading

Description

Gaps have attracted the attention of market technicians from the earliest days of charting. They're not merely conspicuous: they represent price jumps that could signal profitable trading opportunities. Until now, however, "folklore" about gap trading has been common, and tested, research-based knowledge virtually nonexistent. In Technical Analysis of Gaps, renowned technical analysis researchers Julie Dahlquist and Richard Bauer change all that.

Drawing on 60 years of comprehensive data, they demonstrate how to sort "strategic" gaps from trivial ones, and successfully trade on gaps identified as significant. Building on work that recently earned them the Market Technicians Association's 2011 Charles H. Dow Award for creativity and innovation in technical analysis, Dahlquist and Bauer offer specific gap trading tips for stocks, futures, and options.

They consider a wide variety of market conditions, including gap size, volume and previous price movement, illuminating their findings with easy-to-understand diagrams. Coverage includes:

• Understanding what gaps are and how they arise
• Recognizing windows on candlestick charts
• Identifying gaps with the greatest profit potential
• Combining gaps with other technical techniques for a more complete and effective analysis
• "Putting it all together" with real trading strategies

Features

The first complete, evidence-based guide to profitable gap trading: how to recognize the gaps that matter, and trade successfully on them.

• Goes beyond "folklore" to systematically analyze the profitability of gap trading, helping investors identify and trade on strategic gaps and shows how to combine gaps with other technical methods
• Includes powerful tips for gap trading in stocks, futures, and options
• Diagrams illustrate key points throughout

Table of Contents

About the Authors     xii

Chapter 1    What Are Gaps?     1

Chapter 2    Windows on Candlestick Charts     17

Chapter 3    The Occurrence of Gaps     43

Chapter 4    How to Measure Returns     71

Chapter 5    Gaps and Previous Price Movement     107

Chapter 6    Gaps and Volume     121

Chapter 7    Relative Price of Gap Occurrence     139

Chapter 8    Gaps and the Market     159

Chapter 9    Closing the Gap     205

Chapter 10  Putting It All Together     219

Index     227

Back Cover

“Finally! We now have a book that deals exclusively with price gaps. Read how to identify them, trade them, and measure their returns. The authors challenge conventional wisdom regarding the usefulness of gaps on heavy or light volume. Find out if days that contain a high number of gapping stocks will offer clues to the market's overall direction. I thank Julie and Richard for addressing my forty-five-year-old curiosity: What does it mean when prices gap above or below moving averages?”

-Ralph J. Acampora, CMT, Director, Technical Analysis, Altaira Limited

 “Technical and quantitative market analysts who use or are considering using price gaps either in discretionary or systematic trading strategies will want to study, not just read, Technical Analysis of Gaps: Identifying Profitable Gaps for Tradingby professors Julie Dahlquist and Richard Bauer. It adds momentum to the trend of rigorous evidence-based literature. Traders will learn which gaps contain the best profit potential and which contain none. It made me realize how little I knew about this important area of technical analysis.”

-David Aronson, CMT, President, Hood River Research, and author of Evidence-Based Technical Analysis

 “Technical Analysis of Gapssummarizes the authors' comprehensive research on stock price gaps. In it, they describe surprising results in gap behavior that dispel many Wall Street myths. They show practical methods for taking advantage of gaps and profiting from their appearance. This book is a classic. In my opinion, it is the final, complete treatise on the subject of stock market gaps.”

-Charles D. Kirkpatrick II, CMT, Kirkpatrick & Company, Inc., and coauthor of Technical Analysis: The Complete Resource for Financial Market Technicians

 The First Complete, Research-Based Guide to Profitable Gap Trading

 Gaps represent price jumps that could signal profitable technical trading opportunities. Until now, however, “folklore” about gap trading has been common, but tested research-based knowledge has been virtually nonexistent. In Technical Analysis of Gaps, renowned technical analysis researchers Julie Dahlquist and Richard Bauer change all that. Drawing on 17 years of comprehensive data, they show how to identify “strategic” gaps with high profit potential to trade more successfully.

 Building on work that recently earned them the prestigious Charles H. Dow Award for creativity and innovation in technical analysis, Dahlquist and Bauer present specific techniques for analyzing gaps. They address issues such as gap size, volume, and previous price movement; illuminate key findings with easy-to-understand diagrams; and integrate their insights into practical, actionable trading strategies.

 •  Visualize gaps with candlestick charts

   Uncover surprising gap patterns and trading Opportunities

 •  Measure the profitability of gap-based trades

   Gain objective information to assess and select gap trades

 •  Understand subtle relationships between gaps and price movements

   Use both short-term information and longer-term moving averages

 •  Put it all together in profitable trades

   Translate gap research into successful strategies

Completing units:

Technical Analysis of Gaps Identifying Profitable Gaps for Trading

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Serving Professional Traders Since 2008

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