1. "Covering the futures gap" is explained in a broad sense: on the futures price chart, the price jumps upward or downward in a certain area, forming a blank interval with no trading price. This blank interval is called "futures." "Gap", the gap is divided into two types: high opening gap or low opening gap (also called long gap or short gap). Then the price trend reverses and returns to the jump parallel range of this price, filling the previous empty area. This price action is called "gap covering".
The reason for the futures gap in the currency circle BTC is the gap between the time difference and price difference between the futures market and the spot market.
Gap filling is not a necessary condition, but is more of a potential trading opportunity and direction.
Ps: The blue circles in all the pictures in this article indicate gaps, the K lines pointed by the blue arrows are all price parallel covering behaviors of the gaps, the big green arrows are supportive rebound behaviors, and the big red arrows are all resistance downward behaviors. The light blue shaded areas are the price parallel ranges of the gap.
The concept diagram is as follows (the figure below is selected from Bitcoin futures CME BTC1! 2023-January to April, the single K-line level is 8 hours)
1. Reasons for the formation of gaps - Gaps and fillings belong to the price behavior and trading consensus of supply and demand in the market, and are the result of the game between buyer power and seller power. From the left side of the above picture, we can see that the price difference of this high-opening gap in the blue circle is about 1,000 points, which is 5% proportional. This high-opening gap is caused by a large amount of buying orders from a strong buyer force that quickly pushes up prices. Similarly, a low-opening gap is caused by a large amount of selling orders from a strong seller force that suppresses prices - to put it simply, a high-opening gap is a buying zone, and a low-opening gap is a selling zone.
2. The support or resistance of a gap is a phenomenon formed after the psychological consensus of traders is implemented.
As shown in the picture above, the blue arrow on the right points to the K-line to cover the gap and close the cross star to stabilize. The price is supported, and then the price rises all the way to 30K - indicating that there is certain support within the range of the high opening gap. Since there was a large amount of buying in this range before, which caused the price to jump short and open high, it means that the main players were willing to collect chips below this range, so this range has been supported and formed a buying zone consensus. The stronger the support is below the high opening gap. .
Similarly, resistance is because there is a strong seller force in the gap-down opening range, forming a large amount of selling pressure, which leads to price decline, so this range forms a consensus of resistance selling zone, and the resistance is stronger above the gap-down opening. As shown in the following figure (selected from Bitcoin futures CME BTC1! 2021.7-2022.3 range for 6 months, single K-line level is 8 hours).
3. Effectiveness of gap support or resistance: Not all gaps will be effectively filled. In the currency circle, the effective gap of Bitcoin futures is generally above 3%. The larger the gap, the stronger the effectiveness. Even if it is a long-term gap, it will There is market consensus. Market consensus refers to the direction of bulk funds that can influence and control the market, similar to major funds such as large investors and institutions, and does not refer to the consensus of small retail investors. If the daily closing entity reverses or falls below the previous gap, it means that the gap has expired and the market has reversed.
4. Changes in market supply and demand and general expectations of trading consensus will lead to gap filling. Supply and demand are the basic factors affecting futures prices. When there is an imbalance in supply and demand in the market, it may lead to rapid changes in prices and form gaps. As market supply and demand changes, prices may return to a more balanced level, at which time the gap may be filled. In some cases, the filling of the gap may be self-fulfilling due to traders' expectations of gap behavior. If the market generally expects that a gap will be filled, then this expectation itself may cause prices to move toward the gap area and ultimately fill the gap - in simple terms, when most funds are unwilling to buy or sell, liquidity will dry up, and an imbalance of power on one side will drive prices up or down, forming an effective gap filling.
5. Now let’s review and practice a recent effective gap. This gap is selected from the range of Bitcoin futures CMEBTC1 from December last year (2023) to the end of January this year. Find the futures gap where the blue circle is located, which is about 3%, a gap of about 1,300 points, that is, a long gap. Look at the red measuring ruler. It shows that this gap was filled after 49 days. The filling of the price below the long gap of 39,000 received a lot of support buying, that is, the long gap mentioned in item 1 is the buying zone. It was verified, and then the price was pushed directly to 70,000. This is also what I said in the second item. The more the long gap is downward, the stronger the support.
6. Now let’s analyze the gap in a large range of CMEBTC futures that we are experiencing today, April 3, 2024. This gap is obviously a bull gap that jumped up and opened high. The range is 66500-63700, about 2800 points 4.3%. This morning, the price has reached 65000 in futures and 64500 in spot, and has begun to rebound by 2000 points. The support of the buying zone is indeed effective, but the gap has not been filled. What we have to do now is to wait. If you are in a hurry, you can establish a first position first, and then fill it if you are not in a hurry. If you are given the opportunity to go to the accumulation zone below the buying zone, the spot trading pair price is (63400-64000), and we will absorb it together. The stop profit depends on the red line 70,000 pressure level or your own personal trading strategy. The stop loss depends on the real price below the market reversal, and the stop loss is also small.
The above content is purely my personal opinion and understanding of the BTC futures gap over the years. After reviewing the historical trends in the past four years, I think the method has good reference and feasibility. I specially share it with you. If there are any errors and deficiencies, you are welcome to correct and criticize me and welcome to communicate with me.
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