Trading signal: trend continuation after a gap close
Description
This signal occurs after an intraday gap has been closed. The assumption is that the trend is back on track after the gap closes.
| Category | : Trend continuation |
| Components | : Gap up or down : Candlesticks |
| Time frame(s) | : 30 minutes or higher |
| Usable for buy signals | : Yes |
| Usable for short sell signals | : Yes |
In order to generate a signal the trader must define what he considers to be a gap and what he considers to be the closing of a gap.
Define the size of a gap. A gap is defined by comparing the open price of the current candle and the low price (high price in the case of a gap up) of one or more previous candles. You define if it is one or more previous candles. The maximum is five previous candles. Select -1 for the first previous candle; -2 for the two previous candles etc. The further you go back, the bigger you require your gap to be.
In this example, if the parameter was set to -1 it is considered a gap down. If the parameter was set to -2 or -3 it is not a gap. The maximum is -5.
Define the close of a gap. A gap close is defined by comparing the close price of a candle with the high, low, open or close of the last candle before the gap. Depending on how strict you wish to be you can select one of these four parameters.
In this example, if the parameter was set to the Open (1) or the Low (4) the gap is considered closed. A buy signal appears. If the parameter was set to the Close (2) or the High (3) the gap is not closed and no signal appears.
In addition you can define the trading hours. The trading hours are defined by a start time and an end time. If you only wish to get gap close signals during the morning you can, for example, enter 0900 and 1200.
When to open a position?
A buy signal appears after a gap down has been closed. A gap down is indicated by a green background in the chart. The closing of the gap is indicated by a grey background. A short sell signal appears when a gap up has been closed. A gap up is indicated by a red background in the chart. The closing of the gap is indicated by a grey background.
A signal is only valid until the end of the day or until a new gap occurs.
This example shows a gap down (green background) followed by a buy signal (grey background) when the gap closes. Afterwards the market moves up.
This example shows a gap up (red background) followed by a short sell signal (grey background) when the gap closes. Afterwards the market moves down. Later it moves up again.
This example shows a gap down (green background). The gap does not close the same day. Hence no buy signal appears.
Remember: by using the TacticOrder tool you can automate these signals in a simple way without any programming.