![]() ![]() If traders could just blindly buy every stock that jumped 8% in premarket and reap profits, we wouldn’t have much use for charts, would we? Stocks can gap up or gap down, but the direction alone doesn’t tell much of a story. Gap trading can create opportunities for both long and short positions, making it a popular technique amongst bears and bulls. As volatility increases, more traders are drawn to the stock, and volume increases. News is often released after hours or in premarket, where experienced traders and investors tend to throw their weight around. Gaps often materialize due to a catalyst – a bad earnings report, increased guidance, a company scandal, etc. Why trade gaps? Not only do they make frequent appearances in stock charts, but gaps create opportunities for significant profits due to the volume and volatility that accompanies them. A partial gap is when the stock opens above or below the previous close, but still within that day’s range. If a stock opens 1% higher than its previous close, that doesn’t mean it’s ‘gapping up’.Ī full gap is when the price opens completely above or below the previous day’s range. Gap traders care about sharp, aggressive price movement here. But as is true with many technical patterns, searching for gapping stocks can produce a lot of false positives. Like any price movement, a gap moves either up or down and either direction can produce tradable setups. Gaps are notable because the price action doesn’t occur during normal trading hours. Every stock opens with a different price than its previous close, but gap trading involves looking for large empty spaces between the two trading sessions. But how exactly does a price gap happen? Gaps occur when the price of a stock opens above (or below) the previous day’s close by a significant margin. Gap trading is actually a series of strategies and trading techniques based around one particular type of chart pattern: a price gap. Just like any other day trading strategy, gap trading requires technique and practice. ![]() However, just because a pattern is easily identified, doesn’t mean it’s easily traded. Gaps are one of those obvious pattern types. Pattern recognition can be an art form, but some trading patterns are obvious and tend to stick out like moths slamming into a porch light. An experienced trader can spot pennants, wedges, and double tops whereas a novice might only see a random assortment of candlesticks. Technical trading patterns can often be difficult to spot with the untrained eye.
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