GAP TRADING is usually done over a period of two to three day’s trading duration.
I usually commence buying in at around mid-point of the first day’s trading. I usually sell at around the mid-point of the second day,very occasionally in the third day of trading.
The “Selection Criteria” that I use is:-
1. Volume. There must be good volume on the buying side. Volume is more important the day before the gap, not 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 before.)
4. Multiple moving averages,goinng upwards.
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5. More buyers than sellers.
6. A reasonable spread between the “Bid” and “Ask”.
7. Price. I select the best stock with the most leverage available.
8. Peaks and Troughs higher than the previous ones for the last three days.
To let things stabilize, I check the stock at around 40 to 50 minutes after the opening of trading prior to buying in.
A lower share price means more opportunity for a substantial price rise today and tomorrow. This also 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 at that level to lock in the profits and let it ride into the second day’s trading. The 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 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 open 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 low 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.
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.