The Gap Open Online Stock Trading Strategy
The "Gap-Open Trading Strategy" is a popular online stock trading technique that we use whenever a stock gaps open beyond our planned entry price. For example if we plan to enter a stock long at $50, but it opens the next morning higher at $52, we will then apply the Gap-Open strategy.
Here's how it works. Instead of entering immediately at $52, we wait until the stock has been trading for thirty minutes. We then check the highest price that the stock traded at during that time, and re-set our entry point to just above that level; usually .25 to .375 of a point is enough. Once the price is reached, we enter our trade.
It's as simple as that. If the stock is really strong, it will first gap up at the open, dip down as some traders grab a quick profit, then turn around and move higher. By waiting until the first thirty minutes of trading is past, we avoid buying at what is often the high of the day.
Gaps Can Present Profitable Online Stock Trading Setups
Opening price gaps can be up or down, and the size of the gap often has an impact on subsequent price activity. For example, if a gap is relatively wide, many traders will enter positions in the opposite direction of the gap - a tactic called "fading the gap."
A large gap usually indicates that investors have overreacted, and the market will either close the gap, or at the very least move back in a counter reaction to the opening direction. This tendency provides very short-term stock traders a chance to take quick profits when trading the opening gap online.
Tactic When Selling Short
The Gap Open Tactic works as well when we sell short as it does when we buy a stock. If the stock gaps down at the open, wait for it to take out its low of the first half-hour then enter a quarter point below that point.
Fading The Gap
Often, news can dramatically impact the price of a stock after the close or prior to the next session's open. This is often reflected in the opening price being much different than the price at the previous close. The difference between the closing and opening price is commonly referred to as a gap.
"Fading the gap" is a trader's tactic that involves trading in the opposite direction of a gap at the market open. For example, the market has a tendency to pullback after a strong open. This usually happens because of an imbalance between buy and sell orders. Once Market Makers and Specialists work through their overnight and pre-market orders, they will usually either drop their bids or go short. As the price begins to drop, many traders will also sell short, or "fade the gap" in anticipation that the gap will fill. Whenever you see a considerable gap up or down in price at the open, expect the first major move to be in the opposite direction of the gap.
Filling The Gap
Experienced traders are likely familiar with the term "filling the gap" but it's a term worth reviewing. If a stock moves against you, gapping open sharply higher or lower (as a result, for example, of earnings from a "sympathy stock"), consider removing stop orders momentarily and watching the trade very closely. Many times shares will reverse from the extremes of the gap, moving back toward the previous day's closing price, before setting a clear direction for the day.
This is termed "Filling the Gap." Being aware of this technique can really limit losses! Just remember to get out of the way if the gap DOESN'T fill, and simply continues the opening trend. For practice, carefully watch the intra-day charts of a few stocks that show a large gap open, and follow the subsequent trading price action. Good luck!