Swing Trading Strategies – Gap Trading Strategy With RSI Indicator

– [Instructor] Welcome to
the Swing Trading Strategies video series. In this video we will learn
about gap trading strategy. I will also show you how to
combine gaps with RSI indicator to increase the odds of this
particular trading strategy. This entire series is
focused on what to trade, when to trade, and how to trade and I’ve covered swing
trading in great depth and if you have landed
on this video directly, do watch the
remaining nine parts of the Swing Trading
Strategies video series. Link to the same is given in
the description box below. So by the time you
finish with this video you will have learned about
how to use RSI indicator for gap trading and how to
apply this trading strategy to identify
high-probability trades. I will take you through some
basics of gap trading strategy and then will give
out specific rules for using gap trading
with RSI indicator. I will also point out how to identify strong and
weak gap trading setups and how RSI indicator
will help you in identifying gap setups
which you have to target. In the end, I will show
you how to trade the setup by defining risk,
entry, stop loss and I will give a
holistic framework so that you can apply
this gap trading strategy on any given timeframe. So let’s get started. So the first thing that
we should start with is by understanding the
basics of gap trading. Now gaps actually occur
quite frequently on charts. Trading gaps gets difficult
as price usually retraces back to close the gap window
that is printed on the chart. Now before getting
into this in detail, let us first cover some
basics about trading gaps. Now gaps occur on a chart when there is no
trading activity printed between the low
of previous candle and high of current candle or when there is no trading
activity printed on the chart between the high
of previous candle and low of current candle. Now I know this particular
part is slightly confusing. In the next slide, with
the help of a chart, I will explain this further. There are typically four
types of gaps that are known. Number one is the common gap, number two is runaway
or breakout gaps, number third is
continuation gaps, and number fourth
is exhaustion gaps. Now common gaps are the
ones which should be avoided as they typically
occur in the range. Runaway or breakout gaps happen
at the beginning of a trend and they should be targeted. Continuation gaps again happen
while continuation of trend and even this particular gap
setup should be targeted. Exhaustion gaps happen
at the end of the trend and one should
avoid trading these. It’s important knowing
which gap to trade as not all gaps result
in profitable trade. For swing trading, at least
you should be focusing only on two types of gaps. Number one is runaway gap and number two is
continuation gap. In the chart in front of
you there are four gaps that you can see. First and second gap
is a case of gap down. In this there is
no trading activity between the low
of previous candle and high of current candle. Third and fourth gap
is the case of gap up. In this particular case
there is no trading activity between the high
of previous candle and low of current candle. Now whenever you spot gaps
on charts think momentum. Gaps mean that price is off
balance and in such cases price does tend to move, either
in the direction of trend or a mean reversion would happen where price would revert
back and fill up this gap. In either of the cases, you will see that once you
see gap printed on the chart price will move for sure. Now gap trading
is a vast subject. I will cover this in great
depth in months to come. All types of gaps that
we have discussed, there is runaway gap,
continuation gap, common gap, or exhaustion gap need a
separate detailed video. Today’s focus is on
combining gap trading with RSI indicator to identify
high-probability trades and to do this we will be
focusing on identifying runaway and continuation gaps only. For this particular video we will not be covering common
gaps and exhaustion gaps. Now this gap strategy would consist of
three main components. Number one is price pattern,
number two is gap pattern, and number third
is RSI indicator. So the first thing
that we will begin with is by identifying
strong and weak gaps. So first step for you
to identify strong gaps is to check whether
the candle of the gap is strong enough or not. Now there are some guidelines
that I can give you that you need to follow. Number one guideline would be that candles
should be wide range candle. So this is an hourly chart and
we will be using a 60-minute or 30-minute chart
to trade this setup. So look at this
particular candle. This is a wide
range candle range that is the distance between
high and low is wide enough. Basically it should be
greater than 0.8 to 1%, okay? The second guideline is that closing in
case of this up candle should be near the
high point of the day. Now closing for a down candle should be towards the
low point of the day. That is how you judge the
strength of the candle. The third main guideline is
that whenever you spot gaps, if volume increases with
gap this can be one more way to identify strength of the gap. Though this is optional,
but if you do spot a gap and you see strong
volume pickup, that is one more confirmation
that you can lookout for. Now with these
guidelines in mind, which of the three gaps
that you see in front of you are strong enough and why? Now let’s see this on the
chart in front of you. Now look at this candle. Gap up has happened, candle
is a wide-range candle, and closing is happening near
the high point of the day. Now look at this
particular candle. Now this candle is not as
wide as this previous candle, so certainly the wide range
criteria does not meet. Even closing is not as close
to the high point of the day. If you look at this
third candle it is, it fulfills the criteria of range that it is
a wide-range candle and even closing is happening near the high point of the day. So in this particular chart, candle one and candle
three are strong candles that fulfill the
criteria of range and that fulfill the
criteria of strong closing, which is why this gap
and this gap is stronger than the second gap that
you see on the chart. I hope this particular
point is clear. Now look at the chart
in front of you. One gap is marked with the
arrow and another one in a box. Now which one of these two
gaps is the strongest and why? Now let us begin with first gap. Clearly the candle of this
gap is of wide range in nature and closing is happening
near the day’s lows. Also, this is a runaway
gap or a breakout gap since price is coming out
of a well-defined range. And whenever price comes
out of a well-defined range, it suggests initiation
of a new trend. Now second candle
that you see on chart is again a gap down candle. This is a continuation gap because it is forming
after a trend has formed. Now range of this candle is wide but if you look at the closing, closing is not strong at all
because it is nowhere near the low point of the day. Now this candle is called
an indecisive candle. Now just remember one thing that when candle is indecisive
in nature odds of gap, closing out is much higher which means that a
gap is created here. Whenever you see a weak
candle after a gap formation odds are high that this
particular gap will close out. Now for gap trading,
keep two things in mind. Number one, where
is the gap forming and number two,
how does it form? Now these two questions
should be your starting point of your analysis. Now where the gap forms,
that actually shows whether it is a
runaway or breakout gap or it is a continuation
gap and how it forms, that is with respect to
strength it actually points out whether the odds
are high for price following through in
the direction of trend or price will revert back
and closeout the gap. I hope this particular
point is also clear. In this chart you see a set
of three weak gaps, right? So first gap is here, second
is here, and third one is here. The first gap is still
wide-range candle and the close is happening
near the low point of the day so it can qualify as
a valid gap setup. However, the last
two gaps that you see both are indecisive candles. This does satisfy the
criteria of wide range but it is not strong at all. And in both these cases you see that gap eventually
fills out or closes out. So the thing that you’re looking
for is a strong gap candle and range of that candle
should be wide enough for the gap to be
considered as a strong gap. I hope this point
is clear as well. So these are the rules that
summarize strong gap patterns. Number one, candle should
be wide-range candle, volumes should be
higher than usual, closing should be strong
when it comes to gap candles, for up candle closing should be near
the high point of the day, for down candle closing should be near
the low point of the day. And the gap window
that is created, it should not be too wide, that is up to one
to 1.5% is fine. What I mean by this is this
gap window that is created here or in this particular case that is when no trading
activity happens, this should not be
greater than 1.5% because then odds of gap
closing out becomes higher. So now that we have
seen gap patterns and how to identify a strong gap we will now move
towards price pattern in which gap trade
needs to be identified. Now this is a
typical range pattern that I’ve shared
many times before which plays out
across all timeframes. For gap trading prefer 30-minute to
60-minute timeframe only. In this range pattern
price actually fluctuates within a range and
then breakout happens either on the upside or
downside for a trend to emerge. Now any gap that occurs
within this range should be ignored and only those
gaps should be focused upon which clearly shows
price moving out of this well-defined range. Now gap within a range
is often referred to as comm on gap and
this should be ignored because this usually
leads to more whipsaws in a trading account. Range at times won’t be as clear
as I’ve shown on this chart but broadly you should
be able to identify price within a range. Now range can be
horizontal like I’ve shown in the chart in front of you
or it can be in a channel or in any triangle
type of formation. I’ll just explain
this with charts. Now if you see, this
is a horizontal range, this is a triangular range, and this is a downward
sloping channel range. Let us now go through
some examples of range and gap combination. Now this will help you
understand the combinations that you need to target
for this particular setup. In the first case what you see is that price
has formed a nice range and then you see price
moving out of a range in form of a gap. Now candle in this particular
case is not a wide range one but closing is happening near
the high point of the day. Now had I seen this
particular setup in real time I wouldn’t have traded
this aggressively because the candle is
not a wide range candle and when a small candle forms even though the closing is good, price typically
fluctuates in the range and then starts to move higher. So had I spotted
this in real time I wouldn’t have traded
this aggressively, I would have just initiated
some small positions to see what happens. If you look at this second gap that is marked on the chart, this is actually
a continuation gap because gap is forming
in the direction of trend and if you look at
the breakout candle it is a wide-range candle and closing is happening near
the high point of the day so this I would classify
as a strong gap pattern which should be
traded at all times. In this chart,
price is in a range. This pattern is
ascending triangle with
top end of the range is usually flat and
bottom end of range is marked by an ascending line. In this chart, price has
moved out of the range with a runaway or breakout gap where candle is
wide range in nature and closing is happening near
the high point of the day. Such structures are
high-probability setups and they should be
targeted for swing trading. This chart which you
see in front of you is an example of price being
in the range within a triangle. Now price moves
out of this range with a gap which
qualifies on range and strength parameters both. Now reason why trading
gaps is difficult is because when gap occurs,
trader begins to think that gap will
eventually close out and he fails to take the trade thinking that he will
buy into the retracement when gap closes out. Now this is a
psychological barrier and this should be worked upon. Either you become a trend trader or you become a mean
reversion trader. You cannot be both at once. Now trend trader would see
such a gap forming on a chart and he would see this as an
opportunity to ride the trend whereas a mean reversion
trader would see this gap as an opportunity to
short the price here so that price would eventually
fill out this particular gap. So you need to decide today whether you’re a trend trader
or a mean reversion trader and then you need to start
working on strategies that will suit your overall
psychological profile. Now in this chart that
you see in front of you first price gets into
a horizontal range. Breakout above this
happens with a weak gap and the gap
eventually fills out. Now second breakout actually
happens on the downside with a weak gap candle and then price actually fills
out this particular gap. However, if you
look at the chart, once the gap is filled,
price again moves lower in the direction of trend. So such variations also play out and one must be aware
of these setups as well. Now whenever the candle is weak, the odds are always high that
gap will eventually fill out and then either a
new range would form or price would start moving
in the direction of trend. This particular gap
here is also a testimony to the fact that every
trade does not work. Just because a gap
forms on the chart and all the criterias
are fulfilled, it does not guarantee that
trade would work in your favor. This is again a case of price moving out of a
downward sloping channel in form of a weak gap. Now if you look at this candle, wide range is still
kind of missing and close is not happening
near the high point of the day. Now since gap is weak,
price moves sideways first and then starts moving higher. If gap is a strong one,
price usually moves straight in the direction of trend. However, do keep this in mind
that if gap is a weak gap then either trade fails
with price filling the gap and moving lower or price
will first move sideways, gather some momentum before attempting to move
in the direction of gap. Do remember this point
when trading gaps. So now that we have
covered gap setup and price pattern to target, now let us move toward
the role of RSI indicator in this swing trading strategy. Now we will use the concept of
RSI bullish and bearish range to identify
high-probability setups. Now I have discussed RSI
bullish, bearish range in great detail in many videos. So if you are new
to this channel and you don’t know about this
RSI bullish, bearish range the link to that video is in
the description box below. Do check that video out as well. Now in a nutshell,
under RSI bullish range, RSI indicator moves
between 80 and 40 whereas in RSI bearish range, RSI indicator moves
between 60 and 20. For trading gaps on the upside
we will use RSI indicator to check if price is coming
out of RSI bullish range and for trading
gaps on the downside we will check if price is
coming out of RSI bearish range. So in the chart in front of you you see I have
plotted RSI indicator with clear markings of
80-40 range in green lines and 60 and 20
range in red lines. You also see three gap
trades in front of you. First gap happens
with a weak candle. You can see the candle is weak
and then price moves sideways to eventually close the gap. If you look at RSI range
prior to the gap breakout you would see that RSI
was clearly trapped in the 60-20 range with
RSI being close to 20. This means that prior
to gap breakout, price was in bearish range
as per RSI indicator. Now look at the other
two gap breakouts that have happened on the chart. Both gap breakout
happened with weak candles and price moved sideways before moving in the
direction of the breakout. However, if you look at both
these two gap out trades, RSI was clearly in 80-40
range with RSI taking support in the 40 region. This means that
prior to breakout RSI was in a bullish range
and then the breakout happened in form of gap. I hope this particular
point is clear because to trade the setup
successfully on the upside, there are three things
that need to come together. Number one, price should
be coming out of the range. The range setups that we
discussed a few slides back. Number two, breakouts should
happen with a strong candle in case the gap or the
candle is not strong you should wait out. Don’t trade aggressively. Typically if a
gap is a weak one, price does retrace
back or move sideways and then eventually price moves
in the direction of the gap. The third thing to trade this
on the upside successfully is that RSI should be
taking support and 40 and only then you should
be targeting this pattern or this trading setup. I hope this particular
point is clear. I’ll just repeat it once more. The first criteria
that you need to see is that price should be
coming out of the range. Second criteria
that you should see is that breakout should
be with a strong gap. If strong gap is missing do not trade this particular
setup aggressively. The third particular rule
that you have to watch out for is that if you’re trading
gap on the upside, prior to the breakout that
is in the form of gap, RSI should be
taking support at 40 and ideally it should
be in the 80-40 range. Now look at this
chart in front of you. There are four gap trades that
I have marked on the chart. Now first gap trade fails
as when this gap happens, look at the RSI range. Prior to this breakdown
it was in the 80-40 range. Now gap candle was kind of weak and eventually gap fills out. The second trade
fails as prior to gap price was actually
in a 60-20 range so when price is
just in 60-20 range and RSI is closer
to the 20 level and when you see breakout
happening in form of gap, you should be ignoring
this particular setup because eventually price
does fill out the gap and it tends to move lower. The third gap that you
see is pretty interesting as prior to gap price
was in RSI 60 range, that is repeatedly
facing resistance. Gap happened with a weak candle which eventually led to
price filling out the gap but then price moved in
the direction of gap. Now fourth gap that you see happened on a relatively
strong candle. Price did move sideways for
about three to four hours and then strong price action
followed on the downside. Now prior to this fourth gap, see how price was taking
resistance at 60-20 region. This was 20 then price rallied, that is RSI rallied to 60 level. It repeatedly took resistance
when this range formed and then eventually
fourth gap happened and price then moved
down with momentum. So I hope this overall
setup is now clear to you. So this chart that you
see in front of you is a reminder to spot and
target gaps at the right moment. Now remember you are targeting
runaway or breakout gaps and continuation gaps as such. Now once price has
risen about 10 to 15%, let’s say on an index
and 20 to 25% on a stock, targeting gaps actually
becomes very risky as it gets very
difficult to distinguish between a continuation
gap or an exhaustion gap. A chart that you
see in front of you has all the combination
working in its favor. There’s a strong gap
setup, candle is strong, RSI is repeatedly
taking support at 40, but still you see
that gap fills out and trade eventually fails. Now, the thing is
that in hindsight now we can see that this
is an exhaustion gap but in real time it would be
very difficult to identify whether this is
an exhaustion gap or merely a continuation gap. Now, the thing is that
that is why you need to see where the gap is forming. In case you are a beginner
in this particular setup, I would urge you that you
should only target runaway gaps at the beginning. That is when you see
price has fallen down and you see a range forming and then you see a
breakout happening in form of a runaway gap. Those are the sort of setups that you should be
targeting initially. As you gain experience, move
towards continuation gaps and even sort of
identifying exhaustion gaps. So, again I’ll repeat,
if you’re a beginner start with by trading only
runaway or breakout gaps, that is the setup
we have discussed. When you get some
more experience, try and target a
continuation gap and then you get better at this, that is distinguishing
between continuation gap and an exhaustion gap, then you can move towards
exhaustion gap as well. The thing is that here I have
a complete chart printed. That is why I can clearly see
that this is exhaustion gap. Had it been in real time
I would have assumed that this is a
continuation gap as well. So which is why you need to
have a price percentage rule. In case there is a prior
move of 10 to 15% on index or a 20 to 25% move in stock, stop looking out for gaps
until and unless you see a sustained down move, that is
if you want to trade a setup on the bullish side. I hope this particularly
point is clear. So what I’ve done in this video is give gap trading a
context within a framework. Now quite often traders
trade gaps randomly and this should be avoided. You need to focus
on strong gaps, range price pattern,
and RSI range. This is the combination
which you should target. Now don’t risk more than 1%
of account on any given trade and stop loss for
this particular setup would be the recent
high or low of the range from which the breakout occurs. I’ll just show this on chart. Now suppose you are trading
this particular gap, that is the candle
gaps down here, and you want to short sell here. So the stop loss for
this particular trade would be high of this range. Now I do understand that
some of you might feel that this stop is too wide
but when you are short selling you need wide stop losses because price tends
to be volatile and it can easily move
in this particular range. I hope this point is clear. So now what you can do is you
can try and identify trades and post it in the
comments section below. Focus on the combination
I have discussed above, that is strong gaps, range
price pattern, and RSI range. So that’s all for this week in this Swing Trading
Strategies video. In case you have any doubt
about what I’ve shown you, just leave a comment below
and I’ll get back to you as soon as possible. Thanks a lot for
watching this video. Take care and be safe. – [Announcer] Click on the
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33 thoughts on “Swing Trading Strategies – Gap Trading Strategy With RSI Indicator

  1. Hi Guys,

    In this trading strategy, I have covered Gap trading with RSI Indicator and I have shown how to trade gaps.

    Once you finish this video, Leave a comment below and let me know if you spot a trade in the current market scenario.

    Thanks for watching. Be safe.


  2. Hello your videos are great as always. Could you make a video on how to manage risk and profit, ie take full advantage of a trade in profit, and get out soon when in loss. Thanks

  3. Hi, Thank you for upload, It wd be better if you use any dark colour for candle, This Green colour is hardly visible. Thank you

  4. One question, For an hourly/Daily chart reading, What will b ideal months (3/6)..?

  5. Hello Sir! Another great video. Never thought gap trading as a very wide and complex topic. Here's wishing you a very Happy New Year 2019 , Good Health & Prosperity.

  6. Nice explanation, needs practice on charts to identify different type of gap. Thanks

  7. Awesome video and explanation…my question is do we have to wait for gap to occur… because in all examples if we follow stock selection as you have taught in previous videos and RSI bullish and bearish range understanding..we would have taken entry prior to gap I guess… wouldn't it??

  8. Thanks again, another great video from you. You mentioned the time frame is hourly. is that common even during analysis? or only when we are looking for a trade entry ?

  9. like always a great video .. Can we also use this for Intraday ? For example in the pre-open market we can easily find the gaps from 1.15-1.8% then use the 30 min candle to see how strong the candle is (volume/wide/closing near high or close) and trade a 30 min break out or break down using RSI as you showed in the above video ?

  10. Sir yehi video or episode hindi me banaye please sir ji, because that is really useful for us.please, please,please,please,please,please,please,please,please,please,please,please,please,sir,

  11. Sir, tech Mahindra gap formed on 6 Feb . Good candle . With volume . Pls see the chart. Can we say that a good one to trade .?

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  13. Dear TradeWithTrend,
    Well explained about GAPS.
    Kindly make a detailed video on Gap trading of Common Gaps and Exhaustion Gaps.

  14. Sir can you kindly tell me whether the gap up of yesterday would get filled as you have said all gaps would eventually be filled so can we wait for a retracement to invest or we can start investing in the current trend itself

  15. i've been watching these vidoes like a series and i'm enjoying it alot
    its a bit confusing at times being a beginner and lots of questions arises whilst watching the video , but loooking forward to learn
    like @14.51 we never knew Ascending triange will be formed and gap up, what if that trend might have continued without forming a gap? missed opportunity? sorry if i sound retard , but i'm new :3

  16. Hi sir. What should be d range of gapup or gapdown for 15 minutes,hourly and daily time frame.

  17. Good one. Just one doubt. What should be the trading time frame? During the start you showed setup on hourly chart and that can be traded on 30 min chart. But than u suggested to trade only when gap candle closes near high of the day. So should i take buying decision next day or at the end of the session if price near its high.?

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