In recent posts, we’ve been reviewing essential charting basics for futures traders. Futures traders must have the ability to make decisions quickly. Effective charts provide the futures trader with the information — the trading signals — he needs to make those decisions. It is important for futures traders to be able to read and understand charts at a glance. Particularly when market volatility is high, as it has been recently, futures traders must be able to interpret chart information, read trading signals and act instantly. Savvy futures traders will hone their chart-reading ability in order to take advantage of the valuable trading signals they provide.
The Gap
One of the most informative and most watched for charting events, gaps form the basis for numerous futures trading strategies. Also called a window, gaps appear as a void or space — i.e., a gap — on a chart indicating that no trades have taken place. Gaps alert futures traders to the imminent arrival of a major turning point in the market.
There are two types of gaps that futures traders look for:
- Upside gaps appear when the opening price of the current bar is above the closing price and/or high of the previous bar.
- Downside gaps appear when the opening price of the current bar is below the closing price and/or low of the previous bar.
What gaps tell futures traders: Gaps are usually filled fairly quickly after appearing. Gaps can serve as points of price support and resistance, stopping and/or reversing upward and downward market trends. They can also help futures traders differentiate between market movement driven by professional traders as opposed to that caused by amateur trading.
- Upside gaps that occur after several down bars are signs of early professional buying in response to overselling. An upside gap that appears after several up bars indicates late buying by amateur traders.
- Downside gaps that occur after several up bars are signs of early professional selling in response to overbuying. A downside gap that appears after several down bars indicates late selling by amateur traders.
If you want to learn more about charting techniques from a master futures trader, click here to find out about my Futures Trading Secrets System.
About Bill
