Will the gap be filled? How to formulate a trading strategy?

In crypto trading, gaps occur when prices jump without trading in between, influenced by news or market shifts, and whether they fill depends on volume, trends, and key support/resistance levels.

Jun 28, 2025 at 10:35 am

Understanding the Concept of a Gap in Cryptocurrency Trading

In cryptocurrency trading, a gap refers to a situation where the price of an asset jumps from one level to another without any trading activity occurring in between. This phenomenon is commonly observed during market closures or sudden news events that cause overnight price movements. Gaps can be classified into different types, including common gaps, breakaway gaps, runaway gaps, and exhaustion gaps.

The question "Will the gap be filled?" refers to whether the price will eventually return to the original level before the jump occurred. In traditional markets, gaps are often filled due to mean reversion tendencies. However, in highly volatile crypto markets, this isn't always guaranteed. Traders must analyze volume, trend strength, and support/resistance levels to determine the likelihood of a gap being filled.

Factors Influencing Whether a Gap Will Be Filled

Several factors influence whether a gap will close in cryptocurrency trading:

• Market Sentiment: Sudden shifts in sentiment caused by regulatory news or macroeconomic changes can either accelerate or reverse a gap.
• Volume at the Time of Gap Formation: A high volume breakout suggests strong institutional participation, making it less likely for the gap to be filled soon.
• Support and Resistance Levels: If the gap occurs near key technical levels, the probability of retracement increases.
• Timeframe Considered: Short-term traders might see gaps filled quickly, while long-term charts may show sustained movement away from the gap.

Analyzing these elements helps traders assess whether they should expect a pullback or prepare for continued momentum in the direction of the gap.

Developing a Strategy Around Gaps

To create a strategy based on gaps, traders should follow these steps:

• Identify the Type of Gap: Use chart patterns and volume indicators to classify the gap as a breakaway, continuation, or reversal signal.
• Set Entry Points: For bullish gaps, consider entering long positions if volume supports the move. For bearish gaps, short opportunities may arise if confirmation candles appear.
• Place Stop-Loss Orders: Always place stop-loss orders just below (for longs) or above (for shorts) the gap area to manage risk effectively.
• Use Confirmation Candles: Wait for candlestick patterns like engulfing bars or hammers to confirm whether the gap will hold or reverse.
• Monitor Volume During Retests: If the price returns to the gap zone and volume spikes, it could indicate potential filling of the gap.

By combining these elements, traders can build a robust gap-based trading system tailored to their risk tolerance and time horizon.

Integrating Technical Indicators with Gap Analysis

Technical indicators can enhance the reliability of gap-based strategies:

• Moving Averages: Use moving averages to identify the overall trend. If the gap aligns with the trend, it's more likely to continue rather than get filled.
• Relative Strength Index (RSI): Check RSI readings after a gap. Overbought or oversold conditions may suggest a reversal or consolidation phase.
• Bollinger Bands: Observe how far the price has moved from the band. Extreme moves may precede a retracement.
• Volume Oscillators: Confirm whether rising or falling volume supports the gap movement.

Incorporating multiple indicators provides a layered approach to decision-making, reducing false signals and increasing confidence in trade setups.

Risk Management When Trading Gaps

Trading gaps in cryptocurrency involves significant volatility, so proper risk management is essential:

• Position Sizing: Only allocate a small percentage of your portfolio to gap trades, especially when uncertainty is high.
• Trailing Stops: Use trailing stops to protect profits if the price continues in the direction of the gap.
• Avoid Chasing Entries: Entering too late after a large move increases the risk of getting caught in a reversal.
• Diversify Across Assets: Don’t focus solely on one coin. Spread exposure across multiple assets to mitigate single-event risk.
• Backtest Strategies: Before deploying real capital, backtest your gap strategy using historical data to evaluate performance.

Proper risk control ensures longevity in the market, especially when dealing with unpredictable gap behavior.

Frequently Asked Questions

Q1: What causes gaps in cryptocurrency prices?

Gaps occur due to sudden imbalances in supply and demand, often triggered by news events, exchange outages, or sharp changes in investor sentiment over weekends or holidays.

Q2: Can I use candlestick patterns alone to trade gaps effectively?

While candlesticks offer valuable insights, relying solely on them can lead to false signals. Combining them with volume analysis and other indicators improves accuracy.

Q3: How do I differentiate between a sustainable gap and one that will be filled soon?

Look at the volume behind the gap, its position relative to key support/resistance zones, and whether there’s a clear fundamental catalyst driving the move.

Q4: Is it advisable to trade every gap I see on the chart?

No. Most gaps are insignificant or random. Focus only on those that align with the broader trend, have strong volume, and occur at strategic technical levels.