Stock gaps trading strategies that work

Or you can enter from a previous day low when price retrace test of the previous day low.
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The chart for Amazon AMZN below shows both a full gap up on August 18 green arrow and a full gap down the next day red arrow. A Partial Gap Up occurs when today's opening price is higher than yesterday's close, but not higher than yesterday's high. A Partial Gap Down occurs when the opening price is below yesterday's close, but not below yesterday's low.

The red arrow on the chart for Offshore Logistics OLG , below, shows where the stock opened below the previous close, but not below the previous low.

In order to successfully trade gapping stocks, one should use a disciplined set of entry and exit rules to signal trades and minimize risk. Additionally, gap trading strategies can be applied to weekly, end-of-day or intraday gaps. It is important for longer-term investors to understand the mechanics of gaps, as 'short' signals can be used as exit signals to sell holdings. Each of the four gap types has a long and short trading signal, defining the eight gap trading strategies. The basic tenet of gap trading is to allow one hour after the market opens for the stock price to establish its range.

A Modified Trading Method, to be discussed later, can be used with any of the eight primary strategies to trigger trades before the first hour, although it involves more risk. A trailing stop is simply an exit threshold that follows the rising price or falling price in the case of short positions. The stop keeps rising as long as the stock price rises. In this manner, you follow the rise in stock price with either a real or mental stop that is executed when the price trend finally reverses.

If a stock's opening price is greater than yesterday's high, revisit the 1-minute chart after AM and set a long buy stop two ticks above the high achieved in the first hour of trading.

Exhaustion Gap Trading Strategy For Reversals

If the stock gaps up, but there is insufficient buying pressure to sustain the rise, the stock price will level or drop below the opening gap price. Traders can set similar entry signals for short positions as follows:. If a stock's opening price is greater than yesterday's high, revisit the 1-minute chart after AM and set a short stop equal to two ticks below the low achieved in the first hour of trading. Poor earnings, bad news, organizational changes and market influences can cause a stock's price to drop uncharacteristically.

A full gap down occurs when the price is below not only the previous day's close but the low of the day before as well. If a stock's opening price is less than yesterday's low, set a long stop equal to two ticks more than yesterday's low. If a stock's opening price is less than yesterday's low, revisit the 1-minute chart after AM and set a short stop equal to two ticks below the low achieved in the first hour of trading. The difference between a Full and Partial Gap is risk and potential gain. In general, a stock gapping completely above the previous day's high has a significant change in the market's desire to own or sell it.

Demand is large enough to force the market maker or floor specialist to make a major price change to accommodate the unfilled orders.

3 Rules For Trading A Gap - Trade Strategies - Axia Futures

Full gapping stocks generally trend farther in one direction than stocks which only partially gap. However, a smaller demand may just require the trading floor to only move price above or below the previous close in order to trigger buying or selling to fill on-hand orders. There is a generally a greater opportunity for gain over several days in full gapping stocks. If there is not enough interest in selling or buying a stock after the initial orders are filled, the stock will return to its trading range quickly. If a stock's opening price is greater than yesterday's close, but not greater than yesterday's high, the condition is considered a Partial Gap Up.

The process for a long entry is the same as for Full Gaps, in that one revisits the 1-minute chart after AM and sets a long buy stop two ticks above the high achieved in the first hour of trading.

GAP Trading Strategy with Examples - Day Trading Strategies

The short trade process for a partial gap up is the same as for Full Gaps, in that one revisits the 1-minute chart after AM and sets a short stop two ticks below the low achieved in the first hour of trading. If a stock's opening price is less than yesterday's close, revisit the 1-minute chart after AM and set a buy stop two ticks above the high achieved in the first hour of trading. The short trade process for a partial gap down is the same as for Full Gap Down, in that one revisits the 1-minute chart after AM and sets a short stop two ticks below the low achieved in the first hour of trading.

If a stock's opening price is less than yesterday's close, set a short stop equal to two ticks less than the low achieved in the first hour of trading today. If the volume requirement is not met, the safest way to play a partial gap is to wait until the price breaks the previous high on a long trade or low on a short trade. All eight of the Gap Trading Strategies can also be applied to end-of-day trading.

Using StockCharts.

Setup Rules

Increases in volume for stocks gapping up or down is a strong indication of continued movement in the same direction of the gap. A gapping stock that crosses above resistance levels provides reliable entry signals. Similarly, a short position would be signaled by a stock whose gap down fails support levels. Once you identify the stocks that have gapped higher, you can go long. Similarly, if the stock has gapped lower, you can go short.

Stops are placed a few ticks away from the opening price. For profits, you simply trail your stops until you are fully out of the market. One of the benefits of the gap and go strategy is that if you are wrong, the markets will quickly show that. In many cases, the stops are relatively tight, but the profit potential can be immense. The gap and go strategy is ideally suited for the day trader or the scalper.

Traders have taken this simple strategy to fine tune it with other filters. For example, small gaps are usually ignored depending on the volatility of the security that you are trading.

Some traders prefer to make use of moving averages and the overall trend before taking the trade. The general rule of thumb with such filters is that if the gap occurs in the direction of the trend, it is seen to be more reliable compared to a gap in the opposite direction of the trend. When prices gap up, it means that the current open price is much higher than the previous day's closing price. This up gap is also known as a bullish gap.

Stock Gap Trading Strategies That Work – Free Download

Conversely, when today's open price is lower than yesterday's closing price, it is a down gap. Gaps are interesting levels to watch in the markets as they can signify levels of support and resistance. Due to the different confusing aspects of gaps, traders can either get it right or wrong. A lot depends on the market context, which many traders tend to miss. Within the bullish and the bearish gaps, there are also different names given to gaps based on where they occur. As the name indicates, the breakaway gap typically occurs during the start of a trend.

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Here, price tends to break away and gaps from the previous closing price. There is more validity for the breakaway gap when you analyze it in the context of the previous trend. Of course, a breakaway gap is validated only if price continues to move in the same direction of the breakaway gap and is able to maintain the trend. The runway gap occurs during the middle of a trend. When this gap occurs, the markets are signalling that there is still more room to run. Identifying a runway gap can happen by analyzing the overall trend in the markets.

It is even better if the trend coincides with a breakaway gap and is validated by an existing trend. However, once the runway gap occurs, you should be careful because it can signal that there is only so much for price to move further. The exhaustion gap is of course the final step. Here, price tends to gap after the trend has been well established.

It is the last push in price before prices either begin to consolidate or signal a change in the trend.

Exhaustion gaps can be validated only in hindsight and there is no guarantee that the trend will reverse simply because of the appearance of the exhaustion gap. It is all about the market context that needs to be considered. If you look at the gaps in the above chart and the alignment of the moving averages, you can see that the trend changes after the final exhaustion gap is formed.

Following this, price simply trades flat for a small period of time. Later, after the resistance is formed at This marks the start of a new trend and thus, this can be categorized as a breakout gap. Following this, in the middle of the trend, you can see the runaway gap being formed. After the runway gap is formed, price continues to move higher, suggesting that there is still more room for price to rally. Gaps can look good in hindsight but trading them in real time can be quite a challenge. It takes quite a bit of practice when it comes to trading with gaps. The chart below shows an example of the gap and go strategy.

Here, we use the one hour chart time frame. The horizontal lines that you see on the chart are basically the opening session of the trade.