Gaps in Price Action in Crypto Trading: Simple Strategies for Crypto Gap Trading Success

Professional cryptocurrency traders know that price gaps offer profit opportunities. Therefore, they put adequate effort into understanding price gaps. Anyway, interpreting price gaps is an essential skill for anyone who wants to explore certain advanced strategies for profitable crypto trading, like gap trading. This article serves as a perfect guide to help you master price gaps. Its intention is to cover everything from basics to advanced concepts. Shall we begin?

1. Price Gaps in Crypto Trading: All You Should Know

A price gap in crypto trading  refers to a sudden jump in the price, creating a visible unfilled space on the chart. It occurs not only in upward markets but also in downward markets. Generally, it happens when the price skips from one level to another without any traders at the intermediate price. 

Price gaps are similar to slipages, though there are factors that keep them distinct. 

1.1. Price Gaps Vs. Slippages: Prime Differences

We can use five aspects to do a comparison between Price Gaps and Slippages. 

Aspects	Price Gaps	Slippages
Definition	Sudden jump in cryptocurrency price, creating an unfilled space on the chart.	Difference between expected trade price and actual execution price.
Occurrence	Results from a significant price change with no trades at intermediate levels.	Arises when there is a disparity between expected and actual trade execution prices.
Visibility on Chart	Clearly visible as an unfilled space, indicating the jump in price.	May not be visually evident on charts; it is observed in execution results.
Market Impact	Reflects a sharp and immediate shift in market sentiment.	Can occur during normal market conditions and may not indicate a shift in sentiment.
Trader’s Concern	Traders may seek to exploit or react to price gaps for potential profit opportunities.	Traders aim to minimise slippage by using tools like limit orders and understanding order book depth.

2. Reasons for Crypto Price Gaps

Cryptocurrency price gaps stem from two reasons: price volatility and illiquidty.

• Volatility

Volatility spikes due to news releases and major events. Notability, influential players can swiftly alter market sentiment.

• Illiquidity

Illiquidity, arising from a lack of market makers and low trading volume, leads to unstable prices and, consequently, price gaps. 

Additionally, manipulative practices like wash trading and pump-and-dump schemes intensify volatility.

Do You Know The infamous case of “Wolf of Wall Street” Jordan Belfort employed pump-and-dump tactics, illustrating their detrimental impact on unsuspecting investors. Well…., what do you know about manipulative practices? Wash Trading involves a trader buying and selling to themselves, creating a false impression of market activity. In Pump-and-Dump, a group inflates an asset’s price (pump) through false or misleading information, only to sell off (dump) quickly, leaving others at a loss.

3. Types of Crypto Price Gaps

There are four major types of crypto price gaps. They are:

• Common Gaps

These random gaps occur under normal market conditions, lacking specific trading signals.

• Breakaway Gaps

Breaking major support or resistance, this signals the start of a trend. A downward break suggests further decline, while an upward break indicates potential upward movement.

• Exhaustion Gaps

Signalling trend culmination, it involves a gap in the trend’s direction followed by reversal, reflecting the end of the trend.

• Continuation Gap

Manifesting in a trend, it signifies the likely persistence of the ongoing trend, either upward or downward. 

Crypto traders expect price gaps to be filled, but it is more likely with certain gaps like common gaps. Exhaustion and breakaway gaps, signalling trend changes, many not always retrace.

4. Points to Keep in Mind While Doing Crypto Gap Trading

There are certain important points to keep in mind while trading gaps in crypto trading. 

Here are the prime points:

• Identify a gap or a notable price difference between closing and opening prices on the chart.

• Understand gap nature, considering catalysts, sentiment, and prevailing trends for suitable strategies.

• Determine the direction or the expected price movement based on analysis or fundamental factors.

• Establish clear trade entry/exit points, factoring risk tolerance.

• Continuously watch market conditions, adjusting your strategy if needed.

• Stay informed on news, impacting the crypto market, and significant events

5. Top Crypto Gap Trading Strategies

Here are the top crypto gap trading strategies. 

• Gap Fading Strategy

Take a contrarian approach, anticipating gap fill and profiting from price correction. Employ proper risk management due to potential gap non-fill.

• Gap Continuation Strategy

Assume the gap signifies strong momentum, trading in its direction to profit from trend continuation. Confirm the underlying trend and manage risks to avoid reversals.

• Gap Reversal Strategy

Anticipate gap exhaustion and potential reversal, trading against the gap for profit. Confirm reversal points with technical indicators or chart patterns.

• Gap Volume Strategy

Examine trading volume with the gap for insights. Higher volume suggests sustained gaps, while lower volume may indicate potential reversals. Adjust strategies accordingly based on volume signals. 

Endnote

In summary, mastering crypto gap trading requires a comprehensive understanding of gaps in price action, their types and strategic approaches. While common gaps may offer trading signals, trend-changing gaps like exhaustion and breakaway require cautious analysis. Successful traders identify gaps, assess market conditions, and apply appropriate strategies, such as gap fading, continuation, or reversal. Additionally, monitoring trading volume provides valuable insights. With diligent risk management, traders can navigate crypto gaps effectively, capitalising on potential opportunities while mitigating risks for a successful trading experience.