A gap in a chart is like an empty space between one trading
level and the previous trading period a gap is a change in price
levels between the close and open of two consecutive days. Trading
gaps usually form because of an important event that affects the stock
like poor earnings, bad news, organizational changes and market
influences can cause a stock's price to drop or go up .
The typical gap price movements can be found on bar charts
and candlestick charts but will not be found on basic line charts
traders know, basic line chart only connects everyday closing prices,
while bar and candlestick charts present other necessary information,
open, high and low of the period. Those of you who have been trading
for a while know that you can trade the opening morning gaps. This
is a time of high volatility and price movement and can offer great
profits when traded correctly.
You should also know that with the increased volatility comes greater risk
and traders should not trade this time unless you have a detailed plan
on how to trade it that also includes risk trading rules. Scan the
new 52 Week High List the theory is that once a stock makes a new 52
week high it will make new highs as momentum traders run in and buy.
Make sure the stock is Optionable and the
Options should be liquid if you are trading options. Make sure the
Daily & Weekly Charts show an ascending pattern and trend.
Gaps are caused from a large imbalance between buyers and
sellers. This imbalance could be the result of news on the company or
sector or an economic data release that changes investor minds. The
retail traders either place orders in the after hours markets or they
have them stack up for the brokers to fill
on the open. These have an effect on the markets. As a trader, we can
find stocks that are likely to gap up into supply or down into demand
so that we can take advantage of this type of trading. The key is to
know where to look. One thing to remember is that even though the pre
market information may be showing a potential gap, it doesnít mean it
will happen. There have been several times where the gap failed to
materialize even after the data showed it should.
A free source for gapping information is the NASDAQ web
site. On the home page of the NASDAQ website,
www.nasdaq.com, there is a
section for the pre-market. By looking at the leaders in the
pre-market, we can identify which stocks may gap up or down. Based on
where the broad market is opening, this information can be used for
making trades in the morning that have a higher chance of a profit.
As you get down the road of your path of education with the
stock or FX markets you will soon realize just
how important this simple trading strategy is and why traders also
need to understand our own mental pitfalls before we even begin to
trade. Letís assume that we now have a simple strategy in our trading
notes which involves buying at Demand and selling at Supply. We are
going to stay intent on using this method without question, meaning
that every time a trade setup appears to the trader, we need to take
it. The first trade comes up and we take it and it works. The result
is we make money and we feel good. Trade number two comes up and we
take it in alignment with our trading plan and again it works out and
we make money.
Traders exiting a trade to early and not allowing a winner to
run is a common problem. One of the things that youíll want to do
when you notice this thought process is to note it in your
trade log journal. Documenting the
trade information helps you to uncover the mental triggers that are
prompting the sell order. It wasnít the price actionís threat of
hitting our stop; which is an issue for many who move stops in an
effort to avoid the loss; it was the movement of the price going in
our favor that initiated the anxiety and fear that the profit would be
lost if the price action suddenly reversed and then hit the stop loss.
Just let it hit the stop loss and move on to another trade.