Gap Up / Gap Down Bars & Support Resistance Levels

Hi Traders

I would like to share something which I worked out, tested & found out amazingly helpful in my trading, as it improved my trading a lot.

Most of us struggle to find good support & resistance levels, normally we find them by having a look at historical touches but they can be find out easily by recognizing the Gap up or Gap down bars as shown in the charts below (Gap Up bars are indicated by green arrows & Gap Down bars are indicated with red arrows).

How to recognize them:

They are normally oversize bars compare to the bars around them, the reason they are called Gap bars is that if you remove them from the chart you would see a price gap (the bar behind & after the gap bar would not connect together so you will see a gap in price).

Why Gap bars are important:

Composite Operators or Big Boys (Central Banks traders, Commercial Institutions, Hedge Funds & Trading Syndicates) regarded as Smart Money because they out perform the rest 90% of traders in the market. Whenever they complete a campaign of Accumulation (buying cheap) they starts mark up phase or mark down phase after Distribution (selling high). They are well aware of the areas where supply is present which is the biggest hurdle in their mark up or mark down phase. These area are the SR (Support & Resistance) levels.

Smart Money always uses the path of least resistance so we always see that the price hover around the SR levels but whenever they want to cross these supply areas they have to cross it really quick in order to deal with less supply, this is where we see price jumps & causes slippage or re-quotes. This activity plot the Gap Up or Gap Down bars which we can use to plot SR levels (supply areas), the volume is always high on these bars. Volume acts like an accelerator in your car, if you want to go through a steep up hill, you press hard the accelerator in order to generate enough power to pass through that hurdle.

Failed attempts to cross the SR levels (to go up or down):

If Smart Money fails in crossing the SR levels because they find too much supply to deal with, price returns. Just like if you want to go through a steep up hill, you press hard the accelerator in order to generate enough power to pass through that hurdle but find out that it is impossible for your car to cross that hurdle, in result car comes back.

We as retails traders can anticipate these failed attempts & exploit these opportunities in order to generate profits. These failed attempts can be recognize by volume with price action bars, the volume would be high & price action bar would normal or narrow in size with the closing price in the middle or off the low/high. That is the place where we see divergence on oscillators (RSI, Stochastic, MACD or Momentum indicators).

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Using Gap Up / Gap Down bars is quite useful in Intra-day trading as well. By recognizing these gap bars you can anticipate the moves with amazing accuracy along with other indicators & technical analysis. I know some times it really hard to learn or remember these thing in the technical way so I always think in general way that if the car (price) crossed that hurdle (SR level) on full accelerator (high volume) then it will go ahead & will not come back soon so I take the trade in the price direction with the help of other indicators & technical analysis. In other scenario if the car (price) couldn't cross that hurdle (SR level) on full accelerator (high volume) then it will reverse & come back so I take the trade in the reverse direction of the price with the help of other indicators & technical analysis.

Please let me know by comments if this helps.

Note: The above information is for educational purpose only so you should practice the idea on demo account.