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What Is The Gap Up And Gap Down Strategy?
Stock markets are very volatile, and people who actively trade in the stock markets know it well. Traders generally try to ride the trend or take advantage of the large price movements in the market to make profits. Every trader in the stock market uses their own set of strategies to trade the market. Some use chart patterns, price action, indicators etc. Among all these, one of the most famous strategies that traders use is the Gap up and Gap down strategy. Here, they try to book profits based on the gap up and gap downs in the market. Mostly gap up and gap down are seen, during the start of the trading sessions in the market.

The given article gives a broad framework of the Gap up and Gap down strategy. After reading this article you will be thorough with what is in the stock market, why they occur, the types of gaps and the perfect strategy to trade the market using the Gap ups and Gap downs.

What Are Gaps In The Stock Market?

Gaps are the area of discontinuity in the price chart of a security. Gaps are the impact on the price of a stock because of the overrun activities in the previous day, seen in the next trading session. Gaps can be of two types in the stock market. One is Gap up and the other is Gap down.
- Gap-up:
When the opening candle of the day has opened above the closing of the previous day then it is called a Gap up in the market. The candle could be a bulling or bearish candle. The colour of the candle signifies its type. A red candle is a bearish candle and a green candle is a bullish candle.
- Gap down:
When the opening candle of the day has an open, below the closing of the previous day’s last candle, then it is called a Gap down in the market. The same rule applies to the Gap up. The candle could be bearish or bullish. A red candle is a bearish candle and a green candle is a bullish candle.

Read Also: Downside Tasuki Gap Candlestick Pattern

Why do Gaps Occur In The Markets?
- Gaps generally occur because of the bidding in the pre-open markets. So, accordingly, we see Gap ups and Gap downs in the market. The actual trading in the stock market begins at 9:15 but, before that, there is a pre-open market session of 15 minutes wherein you can place your orders depending upon the pre-open prices in the market.
- Earlier what people used to do was in case if the market opened with a Gap down they would make buy positions there, with the possibility that this gap would be filled in the coming market hours as the market always corrects itself. And in case of a Gap people generally make sell positions with the possibility that this gap will be filled in the coming market hours, as the market always corrects itself and the trend will reverse.
- Another reason for Gaps in the markets could be, companies disclosing their quarterly earnings. For instance, if the results of a company are declared in off-market hours, in case of good results the probability is high, that in the next market session, the stock will surely give a Gap up opening and vice versa in case of poor quarterly results.
- Algo trading or automated program trading is also a new factor that affects or influences the Gaps in the market. For easy understanding let’s say, that the trading algorithm might indicate a large buy order because a prior high or the resistance level is broken. The volume of an algo trade might be such that it triggers a price gap in the market, breaking the recent resistance levels indicating other traders to the directional movement.
Types Of Gaps In The Market

There are 4 main types of Gaps in the stock market which are listed below:

Common Gap

A common gap shows the area on the chart where the price gets discounted. Mostly when a gap is formed within the market range then it is called a common Gap. when the fluctuation is going on in the market common gaps are formed within the range of the supply and the resistance levels in the market.

Breakaway Gap

When the markets open the first candle of the day forms at the resistance or the support levels of the market, then this gap is called the Breakaway Gap.

Runaway Gap

It is generally seen in a trending market either in a bullish trend or a bearish trend. Suppose that the market is going in an uptrend and the next day the the stock price shows a gap up following the previous day’s trend.

Traders check for volume at these levels. And if volumes are good they make a buy position here. The same thing applies in the case of the downward trend.

Exhaustion Gap

This type of Gap is also mostly seen in a trending market but here you got to see a gap the next day. If you see a Gap in the trending market, then you have to check the volume. If volumes are less, then you can use a strategy.

You saw that the market opened a Gap up, volume is low, the next candle is bearish then it is an exhaustion Gap.

Island Cluster Gap

When the Gap up and Gap down are adjacent to each other, a reversal pattern is observed here. This type of gap is called an Island Cluster Gap.

Read Also: Upside Tasuki Gap Pattern

A Strategy To Play The Gaps

Below are some very simple ways that you can take into account to develop a trading strategy based on Gaps.

A gap-up stock in an uptrend provides a good opportunity to buy and hold a long position. A gap-down stock experiencing a decline in price in an uptrend provides a good opportunity to buy. A gap-down stock in a downtrend provides a good opportunity to short-sell.

The most effective Gap stocks to trade in the share market are those that are volatile and thus have more price fluctuations. Therefore, you should consider the sector that you would like to trade in. For example, oil and gas, pharmaceutical and retail stocks are considered particularly volatile sectors to trade, especially in the face of adverse economic conditions or a national recession.

FAQs (Frequently Asked Questions)
1. How to predict Gap up and Gap down?
  Gap up and Gap down generally depend on various technical and fundamental factors.
2. How to trade Gap up and Gap down?
  In case of a gap down, traders generally set a buy position with the assumption that this gap will be filled by the market correction.
3. What is meant by gap-filling?
  Gap filling is when the price closes as the previous day closes.
4. How to start trading in the stock market?
  To start trading in the stock market, you need to have a Demat account. You open a Demat account using Pocketful.
5. What is the Gap pattern Trading Strategy?
  It is a simple and disciplined approach for buying and shorting stocks in the stock market.

If you are active in the stock market, you must have heard the term technical analysis quite often. Technical analysis is analysing the market movement and catching the trend. Technical analysis is used for short-term trading or investment. Wherein you gain by capturing the small price difference within a short period.

What is technical analysis?

Technical analysis is analysing the market based on historical data, price & volume primarily. The Main objective of technical analysis is to predict future trends & price movements. This objective goes against the past established theories. Like never trying to predict the markets, focusing on the long term, doing fundamental analysis and more, because for all these reasons Relevance of technical analysis gets questioned.

Technical analysis follows the ideology of history repeating itself. Following this principle, various techniques have been developed over the years. Like trading using price action, indicators, chart patterns and more. Patterns get identified using the past historical data of the companies and the indices present. To draw inferences for making the entry-exit decisions in a trade.

How to do technical analysis?

There are a few things you should understand before starting to do a technical analysis which are:

1. Trend:

The direction in which the market moves is called a trend. In the stock market Trends can be of three types. Upward, Downward and Sideways. Let’s understand each one of them:

Upward trend-
The market is in an upward trend when it keeps making new higher highs. And when the market is in an upward trend we say that the market is bullish.
Downward trend-
The market is in a downward trend when it keeps making lower lows. When the market is in a downward trend and keeps falling we call it a bearish sentiment.

Sideways trend–
When the market moves in a fixed range for some duration it is said to be sideways. We often say that the market is consolidating when it moves like this.

2. Price action:

If you are active in the Stock Market you must have heard the term Price Action. So Price Action is the process of analysing the price movement of a security or asset and determining potential entry and exit points for a trade. While trading with Price Action, the main task is correctly identifying the support and resistance levels on the chart.

Let’s briefly understand what support and resistance levels are:

Support –
Support is that level on the chart from where the price is likely to increase or reverse its trend. Support shows the minimum willingness of the buyers to buy the security. To make a support line on a chart you look for a common point from where the price is bouncing back. Support levels on the chart help to identify breakouts.
Resistance-
Resistance is the price level zone on the chart from where the price is likely to decrease or change its trend. Mark the points on the chart, from where the price is reversing. This way, You will see the resistance levels on the chart.

3. Chart patterns:

Chart patterns are the Figures and patterns that form on the chart of an asset. These patterns have been developed over a while, using historical data from the past 100 years. Chart patterns show or predict the price movements considering how the price has redacted in the past. Broadly chart patterns fall into three main categories that are listed below:

A continuous pattern indicates that a trend will continue for some time.
A reversal pattern indicates that the price may change its movement & there will be a price reversal.
A bilateral pattern may show that the market is highly volatile & the price could go either way.

4. Candlesticks:

Candlesticks are a type of price chart used in technical analysis. It is the most popular type of charts used by traders. It shows the High, Low, Open and Close prices.

A green candlestick depicts that the price is moving in an upward direction. The wick shows the maximum price level it had touched in that period. The upper part of the green body shows the closing. The lower part of the green body shows the opening of the price.
A red candlestick depicts that the price is moving in a downward direction. The wick shows the highs and lows it had made. The upper body part of the red candle indicates the price opening & the lower body part shows the closing price.

5. Indicators:

Indicators in the stock market are mathematical tools developed using advanced algorithms and historical data to predict price movements. Different charting platforms provide their users with several indicators to use. Some famous indicators are listed below:

RSI (Relative Strenght Index):
RSI is one of the most popular indicators among traders. It helps in identifying the overbought and oversold stocks. After reaching a saturation point potential exits and entries are forming in the trade.
MACD (Moving average divergence Convergence):
MACD was developed by ‘Gerald Appel’ in the late 1970s. It was designed to reveal changes in the strength, direction, momentum, and duration of a trend in a stock’s price.
VWAP ( Volume Weighted Average Price):
Vwap is a technical indicator that indicates the price movement based on the volume of the security. Volume is the total buying and selling of the financial asset. In case of high buying volume, the price falls. On the other hand higher buying volume, the price increases.

After understanding all these terms like Trend, Price Action, Indicators, and Chart patterns, it depends on the personal preference of the trader and which tools they use for technical analysis.

Five simple steps of technical analysis for any beginner or a seasoned trader

1. Identify the trend:

The first thing in doing technical analysis is to identify the trend in the market. You can use trendlines to identify the Trend. To draw a Trendline join the higher highs or, the lower lows of the candles. Another way of identifying the trend in the market is by using indicators. Many indicators help to capture the Trend. Analyse if the market is in a downtrend. Up trend or sideways.

2. Make support and resistance levels:

After identifying the Trend in the market, make support and resistance levels. Look for the points from where the price is reversing its movement. Again, you can identify the support and resistance level by yourself or with indicators.

3. Look for breakouts:

A breakout indicates a trend movement in the price after breaking the support or the resistance levels. For example, if the resistance breaks, the price may move in a bullish trend for some time. However, if the support breaks, the price may move in a Downward Trend.

4. Identify entry and exit points:

After identifying a Breakout it’s important to determine your entry & exit prices. Sometimes, the markets are so volatile that you can’t get an entry in the trade at the desired price. In that case, you should not run after the Trade but look for another entry.

5. Pre-determining targets and stop loss:

The last and most crucial step is to pre-define your targets and stop loss even before entering the trade. When you enter a Trade & it’s going in your desired direction. It makes you overwhelmed and without a definitive target. You keep on trailing the trade and end up making a loss.

Conclusion

Thus, summarising the above read, we can conclude that Technical Analysis is also an important branch of investing. It helps us to invest and trade in the market in the short-term and medium-term. Doing technical analysis requires precision, perseverance and practice. While investing or trading one must keep their emotions under control to be successful in the market.

FAQs (Frequently Asked Questions)

What is technical analysis in the stock market?
Technical analysis in the stock market is the process of identifying the trends and predicting the price direction.

What are the best books for technical analysis?
There are so many good books in the market for technical analysis. Example Encyclopedia of Chart Patterns, Technical Analysis of the Financial Markets: and many more.
What is the difference between fundamental analysis and technical analysis?
Fundamental analysis assesses the financial health of the company. Technical analysis analyses the share price movement.

What is the Dow Theory of technical analysis?
Dow’s theory was taken from the editorials of Charles H. Dow. According to this theory, a shift in the bullish or bearish trend is confirmed by multiple indices.

What are T2T (Trade to trade) stocks?

There are various segments in the equity market (AKA the stock market) like the rolling settlement, institutional segment, etc. These segments are overseen by the Security Exchange Board of India (SEBI). One such segment is the Trade to Trade segment (t2t) which we will be discussing today. There are many segments in the equity market similarly there is a T2T segment. Stocks that are not available for intraday trading fall under this category. The delivery of T2T stocks cannot be taken on the same day. Settlement of t2t stock takes place on a t + 2-day basis.

How to identify T2T stocks?

Shares that fall under the category of T2T stock have a symbol of BE attached to them at the end. For instance, let’s take an example of the Vodafone idea. When the share is not in the T2T category the script name is given like IDEA. When the share is in the T2T category the script mane is given like IDEA BE.

Criteria for shifting stocks into the T2T segment.

P/E ratio-

In the case of NSE if the p/e of the nifty50 index is 15-20 and the P/E of the share is above 30, then the stock may be considering moving into the T2T segment
The P/E ratio is a price-to-earnings ratio that shows for every rupee that you are giving to the company how much earning they can make out of it. Remember that the P/E ratio is a significant measure to analyse a stock and its fair value.
However, the P/E ratio is not the only deciding factor in whether or not to move stock into the T2T segment.

Price variation-

When the price of a stock is very volatile i.e. the movement in the share price is very large. The price filter bands or the price circuit are fixed in the scope of positive and negative 5% of the share value for at least 22 trading days.
Also, T2T is not the set category group of shares that you can find in BSE.

Market capitalisation-

If the market capitalization of a company is under 500 Crore And the above criteria are also full filling then that share is likely to be moved into the t2t segment.
The stocks are monitored on a fortnightly basis, or quarterly basis to decide whether to move them to/from the T2T segment.
The reason these criteria have been set is that many times when the Market capitalisation is low, volume is high, and price variation is high there are high probabilities of manipulation in the stock so to protect the investor’s interest, these stocks are moved into the T2T segment.

Need for creating a separate segment.

1. Avoid speculative trading-

The ultimate aim behind the formation of a new segment was to avoid speculative trading in the market. Speculative trading is when the trader buys or sells the share to gain profit from the short-term price movement. Speculative trading is highly risky because the trader does not take into consideration the fundamentals of the underlying asset. He is only concerned with the change in the price movement in the short term.

2. To safeguard the investor risk-

3. To prevent high volatility

Volatility is the degree of variation in the price movement. The stock market is very volatile, i.e. it reacts aggressively to certain news. And trading in such a market can sometimes be very risky especially when some stocks are being manipulated.
Historic volatility measures a time series of past market prices. Apart from manipulation market volatility can be happened because of various other factors Which are discussed below –

Economic factors- These are generally controlled by the RBI and fall under this category namely interest rate, repo rate, CRR, SLR etc.
Political factor– Changes in any kind of government policy, new laws, or a new type of tax issued by a government affect the stock market.
Technical factors- Technical analysis is the study of historical price movements to identify patterns that can be used to predict future price movements.

4. To prevent manipulation

The T2t segment was created so that manipulation of stock can be avoided. Whenever the regulator Security Exchange Board of India suspects that a stock is being manipulated it is shifted to the T2T segment. So that the manipulation can be avoided. For the record stock price manipulation is an illegal activity.

5. Kind of surveillance mechanism-

The decision to shift the stocks into the T2T segment, if any kind of manipulation is noticed, acts as a surveillance mechanism that ensures the smooth and uninterrupted functioning of the stock exchanges.

How to trade T2T stocks?

If any person wishes to trade in the T2T segment then they had to pay the full amount. The concept of margin is not applicable in the t2t segment.

Let’s take an example

If you want to buy 5000 shares of Yes Bank @15 each but it is in the T2T segment.

So you need to have 75000 rupees in your A/C to successfully execute the trade.

Take the trade as delivery, you cannot do intraday trading in the T2T segment i.e. buying and selling the shares on the same day but still if you put an intraday trade in stock that is in the T2T segment then the exchange will cancel your order. And you might even have to pay some penalty fees.

You can only place delivery orders for t2t segment stock and it takes t + 2 days for the settlement of the stock. It takes 2 trading days for the stock that you have purchased to be reflected in your Demat account.

While selling you have to check whether the delivery has come to your Demat account or not Without any delivery you cannot sell T2T shares. Also once the shares are sold you cannot buy them back on the same day.

Who does it?

Stock exchanges do it with the market regulator SEBI.
The process of identifying the security is moving to the treated segment is done on a fortnightly basis.
Security moving from flash to the t2t segment is done every quarter.

What should investors do to trade in the T2T segment?

Ensure 100% payment-make sure that you have the entire amount if you want to place a purchase order in the segment.
To sell you should have delivery in your team at.
One cannot buy the shares again after selling them intraday.

Conclusion

After reading this article you will be able to know everything that you need to in order to start trading or investing in t2t stocks. T2T stocks are not for intraday trading you can only place delivery orders in the T2T segment. The T2t segment was created to protect the investor’s interest as the stocks that show signs of price manipulation are moved to this segment. Because they have a market capitalization of below 500 cr. The P/E ratio is also higher as compared to the indexes. And the price variation is also very high.
So, an investor can trade into the t2t segment, they just need to be a little more careful and know that they should have the whole amount in their account before placing the order. Because the margin is not available for t2t stocks. Start trading T2T stocks today, open a demat account with Pocketful.

FAQs (Frequently Asked Questions)

What is t2t stock?
Stocks that are not available for intraday trading and have BE symbols attached to them at the end are T2T stocks. You can only take delivery orders in the T2T segment.
Is it legal to trade in T2T stocks?
Yes, it is completely legal in India to trade in T2T stocks. They are a little different from normal equity stocks. A few characteristics that set them apart from other segments are.
Where to find the T2T stock list?
You can access the list of the T2T stocks through the NSE website. The link is available here list of t2t stocks.

August 23, 2023

Category: Trading

What Is The Gap Up And Gap Down Strategy?

What Are Gaps In The Stock Market?

Why do Gaps Occur In The Markets?

Types Of Gaps In The Market

Common Gap

Breakaway Gap

Runaway Gap

Exhaustion Gap

Island Cluster Gap

A Strategy To Play The Gaps

FAQs (Frequently Asked Questions)

How to predict Gap up and Gap down?

How to trade Gap up and Gap down?

What is meant by gap-filling?

How to start trading in the stock market?

What is the Gap pattern Trading Strategy?

How to use technical analysis on charts

What is technical analysis?

How to do technical analysis?

1. Trend:

2. Price action:

3. Chart patterns:

4. Candlesticks:

5. Indicators:

Five simple steps of technical analysis for any beginner or a seasoned trader

1. Identify the trend:

2. Make support and resistance levels:

3. Look for breakouts:

4. Identify entry and exit points:

5. Pre-determining targets and stop loss:

Conclusion

FAQs (Frequently Asked Questions)

What are T2T (Trade to trade) stocks?

How to identify T2T stocks?

Criteria for shifting stocks into the T2T segment.

P/E ratio-

Price variation-

Market capitalisation-

Need for creating a separate segment.

1. Avoid speculative trading-

2. To safeguard the investor risk-

3. To prevent high volatility

4. To prevent manipulation

5. Kind of surveillance mechanism-

How to trade T2T stocks?

Who does it?

What should investors do to trade in the T2T segment?

Conclusion

FAQs (Frequently Asked Questions)

What is t2t stock?

Is it legal to trade in T2T stocks?

Where to find the T2T stock list?

Open Free Demat Account