How to Trade Gaps. — ASXnewbie.com
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How to Trade Gaps.

This week we shall have a look at various ways to trade on the stock market.

How to Trade Gaps.

GAP TRADING is usually done over a two to three day’s trading duration. I am usually buying in at around mid-point of the first day’s trading. I usually sell at around the mid-point of the second day, occasionally in the third day of trading.

The “Selection Criteria” that I use for Gap Trading is:-

1. Volume.
There must be good volume on the buying side. Volume is more important the day before the gap; it must not be last week’s volume

2. Price pattern.

3. Trend pattern.
There must be a definite trend line straight upwards.(Peaks and troughs which are higher than the ones the days before.)

4. Multiple moving averages.

5. More buyers than sellers.

6. A reasonable spread between the “Bid” and “Ask”.

7. Concerning entry price. I select the best stock with the most leverage available.

8. The Peaks and Troughs have to be higher than the previous ones for at least the last three days

To let things stabilize and settle down, I check the selected stock at around 40 to 50 minutes after the opening of trading prior to buying in.

A lower share price now means more opportunity for a substantial price rise today and tomorrow. This also obviously increases the profit for the trade. A higher risk applies to these trades as well.

IF my reselected profit level is reached quickly on the first day, I then have the option of selling today or putting in a stop loss (Conditional Order.) at that level to lock in the profits and let it ride into the second day’s trading. This choice is yours.

Very rarely am I in for three days as the share price invariably recedes in these “gaps”. Price gaps usually happen when the trading public realizes (wake up) that a price shock has occurred.

A tip here “Chasing gaps is a great way to throw away money.”

A gap occurs when today’s open share price is higher than yesterday’s closing high, this confirms a surge in buying activity. And also the opposite happens when the open share price is lower than yesterday’s low price. This of course confirms a surge in selling activity.

The bigger the gap the stronger the buying/selling pressure. Gaps are very significant in stocks with a steady volume of sales.

The price gap remains “Bullish” if these two conditions are met.

1. The opening price is higher than the high price of the previous day and continues to climb above the open price.

2. The share price does not fall below yesterdays lowest share price.

Of course if the opposite is happening (bearish) then the share price is obviously declining. Classic gap activity shows a dramatic change in investor sentiment. Stocks with a high number of trades confirm a “Crowd” has gathered and herd action is developing. Which of course is to your advantage.

Gaps indicate significant changes in stock valuations. Either up or down. Gaps also show overnight and in weekend volatility.

Be aware that these gaps always appear after the first 30 minutes in trading. Personally I am always interested in gaps of more than 3%. These typical rallies usually last only at most 3 to 5 days maximum.

Another tip, “A failed gap on or around day 4 invariably signals it is time to take your profits and run.

All of the above information will help you to better understand how important gaps can be in your daily profitable share trading.

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