When trading binary options you need a good strategy to ensure your success. Finding the right strategy can sometimes be hard, especially for beginners. There is a wide array of strategies, some focus on trading signals, some on gambling theories, and some on reading the price charts. A very popular, easy to understand, and easy to apply strategy is the gap strategy.
This article will explain what a gap is and how you can use it for your trading.
What is a gap strategy?
Sometimes assets undergo a big, sudden movement that can lead to a price jump. This jump then leaves a gap in the stock price chart. Most commonly, these gaps occur after a pause in trading, for example overnight or over the weekend, or when news make the relationship of supply and demand switch suddenly. A classic example for a gap would be a stock closing at $100 and opening at $102 the next day. In this case, there would be a $2 gap between the stocks opening and closing price.
Gaps are very interesting for traders. Let’s imagine an upward gap like in the example above, where a stock closes at $100 and opens at $102 the next day. In most cases, the sudden increase in price will also increase the number of people willing to sell the asset, and decrease the number of people willing to buy.
The relationship of supply and demand, therefore, will switch. The stock’s price will turn around, return to the closing price of the day before, and close the gap it had created. The same principle applies to gaps in a downwards direction.
How to trade gaps
A trader that knows and understands the principle of gaps can use it for his trading. He can search for overnight gaps in the morning, news gaps during the day, or weekend gaps in Forex. Once he finds a gap, he knows it will probably close. He can therefore predict the direction the price of the asset will move in, and can convert this knowledge into money by purchasing a binary option in this direction.
There are a number of option types you can use to trade gaps. First of all, you can benefit from the movement to close the gap by purchasing a 60 seconds or 30 seconds option in the opposite direction of the gap. Of course, timing is essential to successfully execute such a trade. Unfortunately, timing can’t be told, it has to be learned through experience. Once again, a demo account can help you get a feeling for this strategy before you use it with real money.
If the gap is big enough, you can also use a touch option to predict the price will touch the level defined by the touch option. Depending on the gap and the price movement before the gap occurred, you can even use a High or Low option, if you feel closing the gap will take long enough for the High or Low option to expire.
Since a gap turnaround is only temporary, all options purchased on a gap strategy should have an expiration date of less than one day. The gap strategy cannot predict events further in the future than one day. As with any strategy, you should try the gap strategy with a demo account before using it with real money. Here is a list of the best brokers that offer a demo account.
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