From the November 01, 2012 issue of Futures Magazine • Subscribe!

Technical Analysis of Gaps: Identifying Profitable Gaps for Trading

Book Review

Technical Analysis of Gaps: Identifying Profitable Gaps for Trading
By Julie Dahlquist and Richard Bauer
FT Press
$35.99; 256 pages 

Trading in the 21st century has made available more tools to analyze the markets along with greater access to these markets than at any other time in history. But, old adages like “gaps must be filled” continue to be parroted back and forth among traders unquestioningly. This has left traders and investors of every skill level at a disadvantage by failing to go beyond a rudimentary understanding of gaps and their potential.

What is the real relationship between gaps and volume? How long does it take for a gap to close? How do you measure real returns in today’s markets using gaps? How do gaps and moving averages relate to each other? Are exploitable gaps more prevalent in certain sectors? How do candlesticks and gaps work together?

Authors and traders Julie R. Dahlquist, Ph.D. and Richard J. Bauer Jr., Ph.D. attempt to answer those questions and more in their new book, “Technical Analysis of Gaps,” an in-depth study of the nature and phenomenon of price gaps in today’s markets. 

The authors approach the study of price gaps from a variety of angles to give you a comprehensive understanding of both where they form and their profit potential. Early on, the authors show in their research that not only have gap trading opportunities been a fertile field for potential profits but, since 1995 to 2011, they also have increased in number by more than tenfold. This is good news for traders who are looking for a reliable price pattern to build a solid trading method around. 

Dahlquist and Bauer explain that as liquidity increases in the markets so does the number of gap occurrences, and tells why liquidity also acts as filter to show which stocks traders should focus on and which to avoid.

Moving averages and their relationship to gaps are closely studied. This is followed by another study that shows the degree of price reversal to be expected after a bullish gap-up.

This is only a small sampling of the findings in Dahlquist’s and Bauer’s new book, and although it can be dry and difficult to read at times, it contains a wealth of information for both the discretionary trader and the systems developer looking to create a trading system around the research described. Any serious trader or student of the market would be well-served to have an edition in his or her personal trading library and, more importantly, apply it to his or her daily trading.

Billy Williams is a 20-year veteran trader and publisher of www.StockOptionSystem.com, where you can read his commentary and a report on the fundamental keys for the aspiring trader.

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