GAP in market profile
Market Profile theory suggests that there are essentially 2 types of traders that make up the market. Day time traders; these are opportunistic traders looking to make daily profits are not concerned about larger trends. And ‘Other Time Frame’(OTF) traders; those who trade for any period longer that a single day. We like to refer to these as institutions… the bigger money
Now we must evaluate a gap in the context of market profile, and ask the question ” was this gap caused by day traders (small money) or the institutions (big money). The answer to that question will tell us whether the gap is an imbalance gap or a professional gap.
A professional gap as the term implies was created by professional traders or institutions. The imbalance gap… well you guessed it by the smaller day traders. Imbalance gaps tend to reverse and fill within the 1st 30-60 minutes of trading
Professional gap is entirely different story. The rule here becomes don’t trade against the big money. If the institutions were responsible for creating this so called professional gap then we must respect the impact they have in the market, and trade with and not against them. That means to take trade in the direction of the gap. Go long if we gapped up, and go short if we gapped down
The final part in this equation is how to tell the difference between a professional and an imbalance gap. To do this you must be a student of Market Profile Theory and understand the difference between markets that are building versus losing value.
Source: Dalton