This video on “Trading Gaps in Stocks,” demonstrates to you how to trade gaps successfully for a living (in a way rarely taught).
It’s a proven approach to trading gaps for daily profit whether you’re trading stocks, futures, Forex or E-minis.
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VIDEO TRANSCRIPTION
Welcome to this video on trading gaps in stocks. We’re going to talk about how to trade gaps successfully 3 different ways. Typically they talk about 4 types of gaps, but I’m going to focus on the primary 3 that are actually tradeable and meaningful. These really good as long as you know how to trade them.
HOW TO TRADE GAPS SUCCESSFULLY, TYPE 1: BREAKAWAY GAPS
The first type of trading gaps in stocks that we’ll talk about today is the breakaway gap. It’s also a type of “gap and go strategy,” meaning that we don’t expect it be one of the filling he gaps stocks.
What you’re looking for is first of all a consolidation pattern.Here we see a consolidation pattern, this should proceed the breakaway gap. This is in my mind, the best type of pattern to have before the break out gap. You’re breaking out of this consolidation, so it’s a gap and go strategy and is perhaps the most reliable approach to how to trade gaps successfully.
TWO TIPS TO LOOK FOR THE GAP AND GO STRATEGY:
Breaking out of consolidation you see couple of things here:
- There are equal highs and equal lows.
- It’s above the 50 MA, below the 50 MA. Above the 50 MA, below the 50 MA. And the 50 period simple moving average is the line that I use as my line in the sand between the bull and bear market. As long as price action hasn’t stayed on one side or the other that means the market hasn’t committed to the bullish or the bearish side of the market sentiment yet.
Here is our breakout and there is our gap. We have a space in between a bar and the bar before it. That would be a breakaway gap. And that is a very strong bullish signal, especially if it’s accompanied with big volume. And here you see that it is. The volume before that here has been relatively small compared to the volume of this day. that means obviously there is a lot of buying, lot of market participants that are participating in this and therefore their strength to that up move.
Markets to tend to wiggle up and wiggle down meaning higher highs, higher lows, higher highs, higher lows, higher highs. So one of the things that we want to look for there is to always looking to trade in the dominant energy of the market.
TRADING GAPS FOR DAILY PROFIT
In other words they could go, move up, and then you could get them to move that to very strong to the down side right after that. You could get a V top for example. So when I talk about dominant energy, what we want to see is, it shows a lot of energy by breaking out of these highs. So that’s number 1, just the price action. Number 2, is the volume that shows a lot of energy.
Then after we’ve done that, the 3rd thing we’re going to look to see if the dominant energy is maintaining to the upside, is what does this retrace look like? Is it very steep? It is coming down at a sharp angle. Is it coming down a large percentage toward the initial impulse? Or is it a shallow move and does it not cover very much time.
TRADING GAPS IN STOCKS, TYPE 2: CONTINUATION GAPS
Now we get what’s called a continuation gap. this occurs again on that same kind of principle. Now increasing volume, notice volume comes back in to the market. We break above this high and the gap actually gives you kind of early indication of that, which you need when you’re learning how to trade gaps successfully.
A lot of times when trading gaps in stocks, they will gap above previous highs like it did here. Now this time it does not. It gaps, only gets stuck at this high for two bars. If I remove this, you see 2 little bars there that market actually kind of hesitated because a lot of people are looking at this high over here, saying oh well we have run right into that resistance level and that’s uncertainty. That’s all that is, it’s hesitation. And then finally it goes up on big volume. So that’s all very encouraging.
Narrow range bars like this, neutral bars, they don’t bother me. I just understand that it’s hesitation uncertainty, it is definitely not a bearish pattern at all.
Let’s get these patterns ingrained into your brain cells so that you have some repetition with this. Notice the angle. It’s very strong. And what’s our retrace. It doesn’t retrace very much at all. Just kind of goes sideways pretty much. Comes down a little bit I guess but you get some nice wide range bars going up. Narrow range bars on the retrace, and again volume retreats.
Another thing that’s very important is timing. How to time your entries. Especially at these lows and if you want to be happy to make my timing indicator available to you, just send me an email at support@topdogtrading.com, and I’ll show you how to get that timing indicator absolutely free. It’s fantastic tool. Super super accurate and precise. So you can keep your stops really tight within the range of a bar to a bar in a half.
TOOLS TO USE WHEN LEARNING HOW TO TRADE GAPS SUCCESSFULLY
Many students ask me how to find a gap up stocks screener. It’s actually one of the most common scanning parameters, so you don’t need a special scanning program for intraday gap trading strategies.
The best place to start is to ask your current charting software provider if they provide it because chances are they do.
TRADING THE GAP FOR A LIVING, TYPE 3: COMING SOON!
PART 2 OF THIS TOPIC IS NOW AVAILABLE BELOW. There is a 3rd type of gap I want to tell you about. There is actually a 4th type as well. I’ll mention it but the 3rd type of gap is when to get out. The 3 gaps give you this information:
- Enter is the breakout gap. That’s the best type. The breakaway gap.
- The second chance to enter is that continuation gap. That’s not as good because you are getting in a little later.
- Then the 3rd type of gap, well that’s the one when you want to get in, and we’ll talk about that in part 2.
Trading Gaps In Stocks Successfully, Video Part 2
Video #2 in the “Trading Gaps in Stocks” video series is below.
Let me know if this video on trading gaps in stocks was helpful to you. Leave a message in the COMMENTS section at the bottom of this page.
PLEASE “PAY IT FORWARD” BY SHARING THIS VIDEO & ARTICLE ON FACEBOOK OR TWITTER by clicking one of the social media share buttons above, or at the very bottom of this article.
In part 1 we looked at trading gaps in stocks in the direction of the trend. So we talked about gaps that start at the beginning of the trend, breakaway gaps and then also continuation gaps such as this, where the trend has already been going for a little while.
We’ve got 4 waves and then it gaps in the direction of the trend with large volume, and we talked about the fact that we would expect a continuation rather than for the gap to close right way. That’s how to trade gaps successfully in that type of market environment.
HOW TO TRADE GAPS SUCCESSFULLY
Now today we are going to talk about the opposite. When will the trend end. So those two types of gaps are entries where we look to get in in the direction of the trend. Now we are going to look at exhaustion gaps which are gaps where we look to get out of a trade or to enter in an opposite direction of the trend.
So here is an example of that. You’ll see that we have a very big gap here from way up here to way down there. So technically sometimes people draw gaps by the way from the low of this bar to the high of that bar.
Technically you should actually draw from the close of that bar to the open of that bar. That was the actual gap. So I’ve seen people do it both ways but technically this is, the gap is defined by the close from 1 bar to the open of the next. That’s very important and I didn’t discuss that in the last video. That’s how you technically analyze a gap and draw markings. And then here again we have large volume. Large volume plays a point on whether we expect that trend to continue or as in this case, to end. That’s one thing.
TRADING GAPS IN STOCKS WHEN THE TREND IS EXTENDED
Now the other thing is that we want to be in an extended trend. So the first five waves of the trend are just the average. Average wave count today lasts about 5 waves. And that is basically higher highs, higher lows. Once it gets beyond that, then we are into an extended trend, we are beyond the norm of the probabilities. We are not trading the rule, we are trading the exception of the length of a trend.
This goes back towards the parable of, well the same, the trend is your friend until the end. So we don’t want to trade the trend, or in the direction of the trend at the end. We want to trade it at the beginning. that’s what your breakaway and continuation gaps are and how to trade gaps successfully
The exhaustion gaps are when the market trend gets, well exhausted and it capitulates. And so then we look for the market to go in the opposite direction. This will be a trend reversal trade and for it to come down. And that’s exactly what it does.
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