gaps market-profile nse nifty banknifty strategy

Gap Trading with Market Profile on NSE - Complete Strategy Guide

• By MarketProfileHQ Team
Gap Trading with Market Profile on NSE - Complete Strategy Guide

Gaps are a daily occurrence on NSE. How you trade them determines whether they become opportunities or traps. Market Profile provides the framework for understanding gaps and trading them effectively.

Understanding Gaps Through Market Profile

A gap is simply the distance between the previous session’s close and the current session’s open. Market Profile context determines what that gap means.

Gap Relative to Value Area

Gap location matters more than gap size:

  • Gap within VA: Less significant, normal rotation
  • Gap to VA boundary: Test of value likely
  • Gap outside VA: Potential trend move or reversal

Types of Gaps in Market Profile Context

1. Gap into Value:

  • Opening inside previous VA
  • Most common scenario
  • Rotational day likely
  • Trade toward POC

2. Gap above/below Value:

  • Opening outside previous VA
  • Directional implication
  • 80% rule applies
  • Important setup

3. Gap and Extension:

  • Gap continues away from value
  • Trend day characteristic
  • Don’t fade early
  • Trade continuation

The 80% Rule for Gap Trading

When price opens above VAH or below VAL and moves back into the Value Area, there’s an 80% probability it will move to the opposite side.

80% Rule Setup

For gap above VAH:

  1. Price opens above previous VAH
  2. Price moves back inside VA (below VAH)
  3. Target: Previous VAL (80% probability)
  4. Stop: Above day’s high

For gap below VAL:

  1. Price opens below previous VAL
  2. Price moves back inside VA (above VAL)
  3. Target: Previous VAH (80% probability)
  4. Stop: Below day’s low

When 80% Rule Fails

The 20% of failures are important:

  • Strong trend days: Gap continues, no return to value
  • Major news events: Fundamental shift in value
  • Large gaps: May indicate new value, not rotation
  • Sector-wide moves: Institutional repositioning

Gap Classification for Trading

Small Gaps (< 0.3% on NIFTY)

Characteristics:

  • Less than 50-60 points on NIFTY
  • Less than 150-200 points on BANKNIFTY
  • Often noise
  • High fill probability

Trading approach:

  • Expect fill within IB
  • Don’t trade gap specifically
  • Focus on normal profile setups
  • Use standard strategies

Medium Gaps (0.3-0.7% on NIFTY)

Characteristics:

  • 60-150 points on NIFTY
  • 200-400 points on BANKNIFTY
  • Significant but not extreme
  • May or may not fill

Trading approach:

  • Analyze VA relationship
  • Apply 80% rule if applicable
  • Wait for IB before decision
  • Trade profile structure

Large Gaps (> 0.7% on NIFTY)

Characteristics:

  • Over 150 points on NIFTY
  • Over 400 points on BANKNIFTY
  • Major overnight event
  • Potential trend start

Trading approach:

  • Don’t assume fill
  • Wait for profile to develop
  • Trade continuation if profile supports
  • Be patient with positioning

Gap Trading Strategies

Strategy 1: Gap Fill Trade (80% Rule)

Setup:

  • Open outside previous VA
  • Price returns inside VA
  • Profile building toward opposite VA boundary

Entry:

  • Enter when price crosses back into VA
  • Direction: Toward opposite VA boundary
  • Use limit order near VA boundary

Stop Loss:

  • Beyond day’s extreme
  • Beyond previous VA boundary you entered from

Target:

  • Opposite VA boundary
  • Scale out at POC

Example - NIFTY:

  • Previous VA: 22,000-22,100
  • Open: 22,150 (above VAH)
  • 9:45 AM: Price falls below 22,100 (enters VA)
  • Entry: Short at 22,095
  • Stop: 22,160 (above day’s high)
  • Target: 22,000 (VAL)

Strategy 2: Gap and Go (Continuation)

Setup:

  • Large gap (>0.7%)
  • IB forms outside previous VA
  • Profile building away from previous value
  • One-timeframe trade after open

Entry:

  • Enter on first pullback
  • Trade direction of gap
  • Don’t wait too long

Stop Loss:

  • Below pullback low (gap up)
  • Above pullback high (gap down)

Target:

  • Trail with developing VA
  • Next significant level
  • Hold for trend day

Example - BANKNIFTY:

  • Previous close: 44,500
  • Open: 45,000 (500 point gap up)
  • IB: 44,950-45,150
  • Price not returning toward 44,500
  • Entry: Long at 45,050 (IB midpoint pullback)
  • Stop: 44,940 (below IB)
  • Target: Trail with developing POC

Strategy 3: Gap Fade at Resistance/Support

Setup:

  • Gap into significant level
  • Previous POC or naked level at gap area
  • Profile showing rejection
  • Counter-trend setup

Entry:

  • Enter on rejection from level
  • Wait for confirmation candle
  • Quick entry needed

Stop Loss:

  • Beyond the level
  • Tight stops

Target:

  • Gap fill
  • Previous close area
  • POC

Strategy 4: Half-Gap Trade

Setup:

  • Gap creates potential but no immediate fill
  • Price stabilizes at gap midpoint area
  • Profile building at half-gap level
  • Testing support/resistance there

Entry:

  • Trade bounce from half-gap
  • Direction based on profile structure
  • Scalp or swing

Stop Loss:

  • Beyond half-gap zone

Target:

  • Full gap fill or
  • Gap extension

Gap Analysis by Time

Pre-Market Assessment (Before 9:15 AM)

Check:

  1. SGX NIFTY/GIFT NIFTY levels
  2. Gap size estimate
  3. Gap location vs previous VA
  4. Overnight news/events

Plan:

  • Gap fill scenario
  • Gap continuation scenario
  • Key levels to watch

IB Gap Analysis (9:15-10:15 AM)

Observe:

  1. How IB forms relative to gap
  2. Opening type (drive, test, auction)
  3. Gap fill attempt or not
  4. Volume and momentum

Determine:

  • Gap fill probability
  • Day type developing
  • Trade direction

Post-IB Gap Trading (After 10:15 AM)

Execute:

  1. Trade based on IB structure
  2. Gap fill if entering VA
  3. Continuation if staying outside
  4. Manage position

NSE-Specific Gap Considerations

Gap Causes on NSE

Global markets:

  • US market close (after hours)
  • Asian market opens
  • European developments

Domestic factors:

  • RBI announcements
  • Corporate earnings
  • Political events
  • Sector news

NIFTY vs BANKNIFTY Gaps

NIFTY gaps:

  • Generally smaller
  • More fill-prone
  • Smoother price action
  • Better for 80% rule

BANKNIFTY gaps:

  • Often larger
  • More volatile
  • Less predictable fills
  • Need wider stops

Expiry Day Gaps

Weekly expiry (Thursday):

  • Gaps can be exaggerated
  • Options activity affects fills
  • Wider stops needed
  • Faster moves

Monthly expiry:

  • Rollover affects gaps
  • Institutional positioning
  • Higher uncertainty
  • Trade smaller

Common Gap Trading Mistakes

1. Fading Every Gap

Problem: Assuming all gaps will fill immediately.

Solution: Assess gap context. Large gaps in trend may not fill for days.

2. Ignoring IB

Problem: Trading gap direction without waiting for IB.

Solution: Let IB form. It tells you if gap will fill or continue.

3. Fixed Stop Sizes

Problem: Using same stop regardless of gap size.

Solution: Adjust stops based on gap size and volatility.

4. Missing the 80% Setup

Problem: Not recognizing when 80% rule applies.

Solution: Track: Open outside VA → returns inside VA → trade to opposite boundary.

5. Holding Gap Fills Too Long

Problem: Expecting full fill when partial fill is available.

Solution: Take profits at POC. Scale out. Don’t be greedy.

Gap Trading Checklist

Before Market Open

  • Calculate gap size
  • Identify gap location vs previous VA
  • Note previous day’s POC level
  • Check for naked levels at gap zone
  • Plan gap fill and continuation scenarios

At Market Open

  • Observe opening type
  • Note initial price action
  • Check if price accepting gap or rejecting
  • Prepare orders

During IB

  • Watch gap fill attempt
  • Track IB range formation
  • Note if price stays outside VA
  • Finalize trade plan

Trade Execution

  • Wait for setup confirmation
  • Enter with appropriate size
  • Set stop loss
  • Plan targets

Advanced Gap Concepts

Gap Windows

Unfilled gaps become important levels:

  • Recent gaps: High fill probability
  • Older gaps: Become support/resistance
  • Multiple gaps: Create zones

Gap and Volume Profile

Volume confirms gap significance:

  • High volume gap fill: Strong level
  • Low volume gap fill: May retest
  • Volume at gap edge: Key level

Gap Sequences

Multiple gaps tell a story:

  • Gaps same direction: Trend
  • Gaps alternating: Rotation
  • Decreasing gaps: Trend exhaustion

Tools for Gap Trading

What You Need

  • Previous day’s VA, POC clearly marked
  • Gap measurement tools
  • Real-time profile development
  • Alert system for level tests

For professional gap trading on NSE, Vtrender provides the Market Profile analysis needed to understand gap context and execute gap trades effectively. Their platform shows previous day reference levels alongside developing profiles for clear gap analysis.

Practical Gap Examples

Example 1: Successful Gap Fill (80% Rule)

Setup:

  • NIFTY previous VA: 22,100-22,200
  • Open: 22,250 (above VAH)
  • 9:30 AM: Price drops to 22,190 (inside VA)

Trade:

  • Short at 22,185
  • Stop: 22,260
  • Target: 22,100 (VAL)

Result: Filled to 22,110, +75 points

Example 2: Gap Continuation

Setup:

  • BANKNIFTY previous VA: 44,500-45,000
  • Open: 45,400 (large gap)
  • IB: 45,300-45,500 (outside previous VA)
  • No attempt to fill gap

Trade:

  • Long at 45,350 (IB midpoint)
  • Stop: 45,280
  • Target: Trail

Result: Continued to 45,800, +450 points

Conclusion

Gap trading with Market Profile gives you context that pure price action lacks. By understanding gaps relative to the Value Area and applying the 80% rule appropriately, you can trade gaps systematically rather than guessing.

Key principles:

  1. Gap location vs VA matters most
  2. 80% rule when price returns to value
  3. Let IB form before committing
  4. Large gaps may not fill immediately
  5. Always have a plan for both scenarios

Master gap trading with professional Market Profile tools. Vtrender provides the Value Area and profile analysis essential for gap trading on NSE.

Related Articles