The new week opening gap (NWOG) is a valuable tool utilized by savvy traders to identify potential support and resistance levels in the market. By combining analysis of the NWOG with Fibonacci retracement levels, traders can maximize opportunities to profit from market inefficiencies. Let‘s break down what the NWOG is, how to trade gaps, and real examples of high-probability setups.
What is the New Week Opening Gap?
The NWOG refers to the difference in price between the previous Friday‘s close and the next Sunday‘s market open. This brief period where the markets are closed represents an inefficiency where price discovery has not occurred. Algorithms and large institutional traders with special access can take advantage of these liquidity voids.
By annotating NWOGs on weekly charts, the levels created often represent significant support and resistance zones in the future. The reason is that markets tend to explore unfinished business created by the gaps in search of fair value.
NWOG Annotation on S&P500 Weekly Chart. Image via TradingView.
It‘s important when analyzing the NWOG to see it in context of market structure. Having 4-5 weeks displayed provides perspective on what type of gap was created relative to recent activity.
Labeling gaps with the date also makes it easy to track at a glance to observe how price reacts at those levels. Either as support in bullish moves or resistance in bearish moves.
Think of NWOGs like checkpoints or save points in a video game. By understanding where the algorithmic bosses are likely to defend (resistance) or stage breakouts (support), you gain an edge to time entries better!
How New Week Opening Gaps Reveal Liquidity Voids
The key edge that NWOG analysis provides is identifying zones where real buyers and sellers have yet to participate. These liquidity voids or imbalances are invisible opportunities.
In gaming, it would be like detecting a secret shortcut or jump point to skip ahead progress. Savvy gamers analyze maps to find techniques that help them level up faster with less time invested.
The same applies in trading—exploiting areas where price discovery has not completed efficiently hands you potential targets the market will gravitate towards in the future.
“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.” – Peter Lynch
Rather than speculate on which way prices will break, focus on planning trades around key levels, waiting patiently for confirmations to trigger entries. This hunt to fill unfinished business creates tradable moves as gaps act as magnets for price action.
Statistics also support the efficacy of a gap trading approach:
- One study by Thomas Bulkowski showed a 65% win rate for stocks closing the gap from a morning gap open. [1]
- Another quantitative analysis identified over 90% of opening gaps filled within the first week. [2]
Clearly gaps represent valuable inefficiencies. Combine this edge with other confluence factors to trade, just like using power-up items with weapon combos in games!
Combining NWOG with Fibonacci Levels
Fibonacci retracement levels reveal areas where reactions may occur on pullbacks or continuations. By combining Fib levels with NWOG zones, the confluence of support and resistance can lead to high probability trading setups.
Common Fib levels to incorporate are:
- 50% retracement – Midpoint where tug-of-war between buyers and sellers leads to chops
- 61.8% retracement – "Golden ratio" where reactions are common
- 78.6% retracement – Significant support/resistance level in strong trends
Here is an example of using Fib levels on the NWOG itself:
Applying Fibonacci to NWOG on Futures Contract. Image from NWOG Flash Cards
You can see how trading the 61.8% level on the upmove worked beautifully! This confluence occurs often, leading to high probability setups.
"Only take trades with an edge and factors working in your favor."
Patience and discipline ensures you only take perfect opportunities. Like activating star power just as your fireball lines up on your target!
Real Examples of Trading NWOG Gaps
Now that we understand the mechanics behind the NWOG, let‘s examine real trade examples using gaps as support/resistance:
Bullish Gap Support
In this example, NWOG acts as support for a nice trend continuation:
Annotating Gap Support Levels for Long Trades. Image via NWOG Flash Cards.
Bearish Gap Resistance
Here the inverse happens, with NWOG showing overhead resistance leading to a strong sell-off:
Gap Resistance Flips Trend Down. Image via TradingView.
Pay attention when price approaches gaps levels and combine with other confluent factors, much like these examples show.
"Let the setups come to you by stalking certain zones on the chart"
This zookeeper mentality allows you to anticipate moves and pounce on signals as they trigger. Think hunting for ingredients and crafting weapons!
How To Combine Gaps with Other Indicators
While NWOG levels provide authoritative support/resistance, combining gaps with indicators adds further confirmation and precision:
Moving Average (MA)
The slope and relationship of price to key MAs aids gap trade analysis significantly. Some approaches include:
- Playing MA crosses and tests within NWOG zones
- Using MAs as trailing stops for gap trades
- Planning entries on retrace moves to MA levels
Relative Strength Index (RSI)
RSI helps gauge momentum as gaps breaks occur:
- Overbought/oversold readings suggest possible trend changes
- Divergence hints at shift in power between buyers and sellers
Volume
Climax bars and increased volume highlight conviction as gaps get retested.
For example, entering breakouts on high volume boosts odds as more participants back price action.
"Combining 60 minute gap support with the 21 EMA hold gave me the perfect long entry that I was hunting for!"
Reading the tape and sensing where algorithms are hunting stops or initiating breakouts keeps you aware of traps.
How Gaps Fit in Broader Trading Approaches
As we have discussed, gap trading is quite systematic and rules-based. Having exact levels pre-defined hands you opportunities on a platter!
However even with an edge, gap trading is best incorporated into other proven, backtested methodologies and systems.
Some top-level strategies include:
Trend Following
Gaps can signal continued momentum in the direction of the daily or weekly trend. Trade pullbacks within gap zones to join into existing moves.
Reversals
Turning points form as price fails to fill a gap, rejecting strongly off the level. Combine with reversal patterns or climax volume to capture new swings.
Range/Mean Reversion
Once support caps upside or resistance limits downmove, expect normalisation back towards gap midpoints or value areas.
Breakout/Momentum
Monitor fresh expansion gaps with volatility for entries as price breaks structure with force. Surf the wave as new trends form.
"I added NWOG levels into my trading blueprint to plan the slay."
Having contingencies for various market conditions means you always bring the right weapons to battle!
Additional Tips for Trading NWOG
Here are some final best practices when incorporating NWOG analysis:
- Actively track gap levels from recent weeks, labeling dates on chart
- Monitor both support and resistance tests of these levels
- Combine gaps with Fibonacci for highest probability
- Fine tune entries with other confluence like patterns, EMAs, momentum
- Set alerts at gap levels to monitor price activity
- Use wider stop losses given significance of levels
And of course, have a trading plan with defined risk management for each setup!
Adopting a Trader Mindset
All the tactics in the world can’t help those lacking the right trading psychology and mental framework:
Treat trading like a video game
Embrace the challenge of mastering your trading skills through screen time. Losses should encourage you to learn, much like dying makes you better in games!
Grind out progress
Consistently follow your trading plan even through losses. Eventually the odds play out in your favor just like grinding mobs to level up.
Find and create unfair advantages
Uncover market inefficiencies with tools like the NWOG to execute on opportunities better than competitors.
Take losses quickly, let winners run
Bank profits as they scale exponentially. Small losses maintain longevity so you can play more hands.
Hopefully you now have greater confidence in trading gaps and the edge this can provide in the markets. Master this high value tool along with other ICT concepts to unlock your true potential as a trader.
It all comes down to maintaining consistency, patience and risk control when high probability trades arise. The giant boss battle may seem intimidating, but with the right strategies you will emerge victorious!
Feel free to share any experiences utilizing the new week opening gap!