In this post we go over Gap Trading; types of gaps, tips, and how Daily Stocks Pro can help you be a better Gap Trader.
Gaps are unfilled areas on a chart, in other words, an area where no trading takes place. A Gap can be either up or down and generally it is news driven.
Gaps are significant; there are many ways to take advantage of gaps. Some market speculators trade when fundamental or technical factors favor a gap and some fade gaps in opposite direction once a high or low point has been determined.
There are four types of gaps (source: wikipedia):
Breakaway Gap: It occurs when prices break away from an area of congestion. When the price is breaking away from a triangle (Ascending or Descending) with a gap then it can be implied that change in sentiment is strong and coming move will be powerful. One must keep an eye on the volume. If it is heavy after the gap is formed then there is a good chance that market does not return to fill the gap. When the price is breaking away on a low volume, there is a possibility that the gap will be filled before prices resume their trend.
Common Gap: It is also known as area gap, pattern gap or temporary gap. They tend to occur when trading is bound between support and resistance level on a short span of time and market price is moving sideways. One can also see them in price congestion area. Usually, the price moves back or goes up in order to fill the gaps in the coming days. If the gap is filled, then they offer little in the way of forecasting significance.
Exhaustion Gap: Signals end of a move. These gaps are associated with a rapid, straight-line advance or decline. A reversal day can easily help to differentiate between the Measuring gap and the Exhaustion gap. When it is formed at the top with heavy volume, there is significant chance that the market is exhausted and prevailing trend is at halt which is ordinarily followed by some other area pattern development. An Exhaustion gap should not be read as a major reversal.
Measuring Gap: Also known as Runaway Gap, a Measuring gap is formed usually in the half way of a price move. It is not associated with the congestion area; it is more likely to occur approximately in the middle of rapid advance or decline. It can be used to measure roughly how much further ahead a move will go. Runaway gaps are not normally filled for a considerable period of time.
Things to remember:
- Once a stock has started to fill the gap, it will rarely stop.
- Be sure that you correctly classify the gap. e.g. Exhaustion and Measuring Gaps predict the price moving in different directions.
- Be patient; wait for confirmation before taking a position.
- Be sure to watch the volume.
Daily Stocks Pro and Gap Trading
Daily Stocks Pro scans all US stocks for Gaps in real-time. If you are a day trader, you can use the constantly updating list to identify different type of gaps and trade by favoring or fading these gaps. If you are a swing trader, you can wait for the market close for your end-of-day gap trading strategy.
Please note that Daily Stocks Pro also provides auto Fibonacci lines. This is significant in Gap Trading since gapping a 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.
Here are some screenshots from Daily Stocks Pro: