Many different methods can be used when day trading in the futures market. One of these is called gap trading, whereby opportunities present themselves before or after market hours. This might result in higher or lower prices and thus open opportunities for profitable trades. This method forms one of the many trading tips used in technical analysis approaches to trading E-mini futures contracts.
Defining a gap
The key to gap trading is related to the differences in price from the previous market session, either above or below it. This is the difference in the opening price and closing price between two market sessions. These sessions can be set at any length of time, from minutes up to a day. The gap is displayed on charts among candlestick patterns as the price surges and drops above or below price levels during that session.
There are three types of gaps. The first is a breakaway gap, which occurs toward the beginning of a new trend and is determined by both the time and price of the gap. The second type is the runaway gap, which is located toward the center of the trend and often indicates a recurrence of the previous trend. Finally, there is the exhaustion gap, which occurs further along in the trend as it comes to an end.
These three gap types can then be separated as either partial or full gaps. A partial gap is when the opening price is higher than the previous closing price, but not lower or higher than that session’s maximum or minimum price. A full gap occurs when the opening price is higher than that of the previous session’s highest price.
An evening star pattern is a fairly reliable pattern that can be seen when there are three price bars or candlesticks next to each other with a gap on either end. This pattern occurs toward the upper end of the trend. It is often seen after a steady price increase and indicates a reversal of this current trend.
The opposite of this is the morning star pattern, which is located toward the bottom end of the trend. The morning star pattern signals an increase as it reverses from its downtrend. Both of these patterns can be found having full gaps.
Support and resistance levels
As used in forex and CFD trading charts, support and resistance levels are important patterns in E-mini futures trading. When gaps cause strong price action, support and resistance levels can be formed. A stronger price gap indicates better levels, which allows for trade positions in the reversal of the trend. Full gaps are much more reliable, as a partial gap can allow the resistance or support level to be easily broken.
Trading gap pullbacks is viable and includes following the price movement as it either approaches a lower or upper gap. Once this occurs, you can place a buy or sell position in the pullback of the price movement. This is the standard approach, but another method is available. You can plot gap areas and use this to initiate a sell or buy position in the predicted pullback.
At times, the start of a trading session might reveal a smaller gap in which E-mini futures contracts can be opened. Charts of lower time intervals will reflect this better than larger time periods. You can plot the gap area at the opening and go long or short after a candlestick penetrates under the gap and then closes. After this, hold a short position for one minute and then close the position.
E-mini futures contracts allow for many other strategies of gap trading, but these can be simple to apply and recognize. Through the study of these principles and thorough testing, gap trading can produce many appealing opportunities.