Trading Runaway Gaps

Trading Runaway GapsA runaway gap can form the basis of a trading strategy that provides a high percentage of winning binary trades. You can learn all about trading runaway gaps here.

Trading Runaway Gaps: the basics

A gap occurs on a price chart when the price of an asset makes a leap from one period to the next. As with all price fluctuations in the markets, a gap is caused by a shift in the balance between supply and demand. The significance of a gap varies greatly, depending on whether it was caused by a surge in supply, a drop in demand, or other possible permutations.

In the case of runaway gaps, an accelerated trend is the likely outcome. A runaway gap most often appears in the upper part of a bullish trend or the lower part of a bearish trend. This is an indication that the majority of traders thought the market wasn’t moving fast enough. They recognized the ongoing trend, but still wanted to keep investing. Obviously, this suggests that the price will continue in the direction of the prevailing trend.

How do I identify a runaway gap?

It is crucially important that you acquire the ability to tell a runway gap from breakaway gaps and exhaustion gaps. The first is an indication that a new trend will appear. The latter is an indication that an ongoing trend is about to end. If you get your gap types confused, you risk making costly investment mistakes.

Here are some helpful pointers on how to identify a runaway gap:

Look for gaps in the higher / lower ranges of trends

Breakaway gaps appear when the market is pushing the limits of its higher or lower ranges. In a bullish trend this means the upper areas; in a bearish trend you should focus on the lower regions.

A technical indicator will make identifying these ranges more convenient. An oscillator, for example the Money Flow Index, can be a reliable tool for this sort of exercise. In events where such an oscillator is in an oversold or overbought area, you can be quite sure that the market is currently in a trading range appropriate for runaway gaps to occur. Such a methodology would be especially apt if you are planning to devise an automated trading strategy or a signal generation system.

Look for a high trading volume

All market movements have greater significance when they occur in moments of high trading volume. Runaway gaps are no exception. Seeing as runaway gaps indicate an important change in market sentiment, you need to make sure that a lot of traders share the sentiment the gap is pointing towards.

A high trading volume is a reliable indication that a gap really means that a major change in market sentiment has occurred. Such a change can drive the market for a prolonged period of time.

A very convenient way to find breakaway gaps is to scan the market for sudden increases in trading volume. In many cases such an increase will be accompanied by a gap. Should that gap appear when a trend was close to the top of its trading range, chances are we are talking about a runaway gap.

How to start trading runaway gaps?

There are many approaches to trading runaway gaps. Here we present two of the most commonly applied ones.

1) Use a touch option

You can use touch options when to trade runaway gaps. Seeing as a runaway gap indicates that the ongoing trend will go into a stronger movement it could well be able to drive the asset in question towards a touch option’s target price. Your broker will only take current market conditions into consideration when calculating payouts. This means it will disregard the occurrence of a breakaway gap. This is something you can use to your advantage.

You know the market is about to move strongly in the direction of the trend, but your broker doesn’t. This puts you in the driver’s seat. In such conditions, you are one step ahead and can invest in a touch option with a better chance of winning than usual.

Seeing as touch option can have payouts in the range of 300% to 500% this is a real moneymaking opportunity. Even if you only win a relatively low percentage of such trades, the high payouts would still result in a healthy profit.

2) Invest in High / Low options

Of course, you can also invest in high/low options, if you prefer. This would give you a significantly lower payout, but your chances of winning a higher percentage of trades would increase significantly.

In order to follow this approach, you simply invest in a high/low option in the direction indicated by the runaway gap. Choose a short to medium expiry time relative to the time frame you are operating with. Should you, for example, be trading a 5 minute time frame, you should probably be investing in an option with an expiry time of about 15 minutes. This should yield a high percentage of trades won.

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