This pattern is also based on a gap but not a gap that is filled, but rather on a gap that is not filled! To see what I mean by this last statement.
Some traders believe that a gap on a chart is significant. While I agree, I believe that most traders do not use chart gaps properly. To rectify that situation, let us look at gaps again. Before looking at a chart let’s define the term “gap.” A gap up occurs when a market opens above the high of the previous day and does not trade into the range of the previous day.
A gap down occurs when a market opens below the low of the previous day and does not trade into the range of the previous day. Note that gaps can only be used on day session charts, not 24-hour. gap-up and gap-down patterns. Most traders are familiar with gaps, of which there are several types. The gaps described above are all gaps, however, some are one-day gaps and others are two-day gaps. What is the difference? A one-day gap is a gap.
Setup and trigger
ow, look at the setup and trigger for a two-day gap. Setup for a buy is a one-day gap up with this trigger: If the low of day 2 and the low of day 3 are higher than the high of day 1, then a two-day gap up has triggered on the close of day 3. Setup for a sell is a one-day gap down with this trigger: If the high of day 2 and the high of day 3 are lower than the low of day 1, then a two-day gap down has triggered on the close of day 3. Illustrates the two-day gap-up and two-day gap-down setups and triggers. Entry for a long position on the two-day gap up is on the close of trading on the second day. Entry for a short position on the two-day gap down is on the close of trading on the second day.
The profit target is the range of the two days that constitute the gap at which point you take profit on part of your position. Then you trail a stop at 75 percent on the balance of your position (i.e., locking in 75 percent of the profit)
The first profit target was exceeded and a trailing stop was then implemented. Trade was stopped as noted
This lesson defined the two-day gap trade with concise illustrations and definitions. The practical application of the method was stressed with specific examples. Please spend some time studying two-day gap trades and applying your knowledge to the charts in the quiz that follows. Please take a few minutes to answer the questions below. Note that this quiz will require more attention than previous quizzes. Take your time.
Please follow the indicated instructions carefully. Mark the signals, trades, and exits according to your best estimate. You need not indicate the exact prices at which trades were triggered or closed out unless you have access to a chart with exact prices.