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GPSM | Will Bell | Nov 7th, 2024
Unleash the Power of Gap and Go Trading: Turbocharge Your Profits with Simple Strategies
If you’re just starting out as a stock trader, one of the first things you need to know is the exhilarating feeling of making a profit during a winning trade.
As most of you guys know...
...I've been trading stocks for over 20 years, but it doesn't take that long to know when a stock has High Premarket Volume, it Gaps Up in price from the previous trading day's closing price.
The Gap and Go trading strategy is one of your easiest ways to spot potential profit in the market.
Today you can get on your way to your 1st win or 500th.
Traders who aim to make a profit using the Gap and Go Strategy often use some sort of pre-market scanner, or have Watchlist Access from a trusted Trading Newsletter to scan for stocks that have solid volume spikes in the premarket trading hours.
This strategy is a very popular trading strategy with stock traders.
Every morning there are a ton of gapping stocks that will ping pre-market scanners. Online traders will watch for them to spot potential trading opportunities in order to make a profit.
I've created this training “How To Use The Gap and Go Trading Strategy and Make a Profit” to help you understand how Gap and Go Trading works, and to lay out best trading practices when using the Gap and Go strategy.
How To Trade the Gap and Go
Before we began a little house cleaning is needed...
A few fundamental concepts, such as volume, volatility, risk tolerance will be necessary for you to grasp so that we can dive into the specific trading strategies discussed in this easy-to-understand instructional article on Gap and Go trading.
You need to understand these Fundamental Market Forces in-depth in order to gain a stronger grasp of the Gap and Go Trading Strategy.
Keep in mind you’ll only have a very short time window on the open in which to execute your trades...
...you must be able to process all of the trade execution signs that are presented to you in a timely manner in order to trade this strategy effectively.
Market Force - Volume
Perhaps the most important tool that you can have at your disposal is the ability to understand the market force that governs the money of a stock, and that’s Volume.
On our site...
I have released a brilliant and easy-to-understand in-depth article on how to use the Relative Strength Index which operates as a standalone oscillator, but it’s a useless indicator without volume in a stock…
...However, when you combine oscillators like the RSI with volume you will get a more accurate read of information of each stock you’re tracking.
Volume alone can help confirm if any and all oscillators are showing if a stock is a true break out indeed, or not.
The significance of high or low volume activity and what it means for a trader must be understood, particularly when it occurs at critical Support and Resistance levels.
Seeing high-volume attack...
...and push through a Support or Resistance area is a sign that sellers or buyers are in command.
This means that enough financial energy has been expended to actually signal a continuation in trend for an extended period of time.
In general...
...You want to see a spike in volume as the price approaches a Resistance Level...
...you want to see it take out the Resistance level with higher volume than the previous volume figures recorded at the same price level in the previous period.
Light Volume, On The Other Hand, Is Not Always A Negative Thing Trust Me.
When there is little interest in a stock, the stock can rise much higher and much faster than if there is a lot of interest in the stock, and I can't tell you how many times I've seen this.
When a stock is in a confirmed uptrend and you are riding the trend higher, this can be a positive development for you as a trader as long as you sell your shares at the right time.
However, if there is a large volume spike following a sustained uptrend, it is important to be cautious.
This could put a stop to the bullish price action, at least in the short term and a bearish reversal could be looming.
In a situation like this, the volume would indicate that traders are selling shares.
Market Force - Volatility
As a trader, you must note that understanding the principle of action, vs reaction of any market decisions... of stock positions you're in... is critical to achieving success in the stock market.
Consider this scenario:
A stock moves substantially higher over the course of three days without any significant price retracements.
A trader should anticipate a reaction that is a divergence from the previous move higher in that stock…
So, in other words, as the stock goes higher without any price retracement there are traders on the other side of that coin in anticipation of the stock’s reversal in price.
While you’re hoping for the stock price to go up, other traders are betting on the stock price going down.
In this scenario, we can expect high levels of volatility on the other side of the market when stocks move extremely quickly, either up or down.
This can signal large moves up and down where emotions take over and technical analysis and other disciplines are thrown to the wind.
Keep this in mind as well when deciding which stocks to trade and which ones not to trade, or even when you’ve already taken a position in a trade.
Increased volatility results in larger price action swings, which in turn results in irrational market price action.
If you’re trading penny stocks, having a mastery of understanding of volatility with their relationship of wild price swings is critical to winning your small-cap trading contest.
However, on the other side of the discipline of understanding volatility...
...Some traders believe it is more beneficial to trade large-cap stocks that attract a lot of money, rather than small-cap stocks because of the massive levels of volatility that small-cap stocks are known for.
Wild volatility increases put your money at a higher trading risk than normal.
Again this is a risk/reward balancing act that you as the investor have to understand.
Some traders can stomach the high risk to gain the reward trading style, and some investors can't.
You as a trader need to know where you fall in line to this respect.
Market Force – Your Tolerance for Uncertainty
This at a glance appears to be straightforward...
...but believe me when I say that in the heat of any trading contest, or before you take a position in a trade, you will be challenged by the Market Forces of Uncertainty.
To deal with this…
...before you begin trading... you must determine your trading risk to counterbalance uncertainty while you're ready to buy a position in a stock.
As Poor William says in his Almanac of 2012 "Never Trade With Money You Cannot Afford To Lose".
Define the amount of money you are willing to risk and determine whether or not a potential trading security fits into your risk profile before proceeding.
It’s unhinging to think about the unreasonably large numbers of traders who believe that they can approach a Dow security in the same way that they approach a New Brazilian Internet Stock.
Because of the massive price action swings that occur in these stocks, depending on your personal trading rules, a high volatility stock may force you out of a potentially profitable trade that was otherwise profitable.
This happens all the time, and weak-handed traders are taught the hard lesson as they sell their shares.
If you are unable to emotionally handle large swings in the stock market, avoid trading them… I mean it’s really that simple. Every trader is uncertain about what a stock is going to do because no one can predict the market with 100% accuracy on any play.
Plus keep in mind there's always another trade to be made, and that’s the one you’re going to make.
Don’t push yourself out of your trading comfort zone because if you do… you will lose 3 out of 4 trades.
If you still feel the need to trade these stocks however, you should drastically reduce the size of your open positions. This is until you have developed your trading disciplines in comfort.
(In other words, you're comfortable in your mind and on your balance sheets with losing $3,000 on a trade today).
You have to be ready for something like this...
...and keep in mind that consistency is essential in online trading.
You do not want to disrupt that by incurring larger losses that could easily compound in your account.
Trade with discipline guys no matter how much you want to trade the stock.
Beware of the Market Forces called your emotions as they will inflate your bravado temporarily to falsely inflate your Tolerance for Uncertainty.
Opening Gap Trading Strategies #1 – Gap and Go Strategy (AKA the Gap and Go Strategy)
The Gap and Go Strategy Is The First Of The Morning Gap Trading Patterns That We Will Go Over.
When the market opens, the Gap and Go strategy begins with a bullish Gap, which is followed by a further rise in the stock price.
It is critical that the trading volume be high at the time of the Gap in order to be successful.
The volume will decrease after the Gap, but it will still be high compared to the previous (time frame your trading) day.
After the Gap, the stock is essentially doomed to remain stagnant. This prevents short traders from being able to exit their positions at any point in time.
The trading day begins with a bullish gap up in price.
The first three 5-minute candles are in favor of the bulls. This is the time of day when trading volumes are at their highest.
We buy META Inc because we believe there is a possibility of a Gap and Go pattern appearing on the chart.
Then, of course, we place a stop loss, which is the one thing I hope you take away from reading the content on this site – always use a stop loss when trading.
We place the stop loss order at the bottom of the last candle from the previous trading session to protect ourselves from losing money.
Take note of the fact that the Meta Platforms entered a strong bullish trend immediately following the Morning Gap.
Drawing a basic trend line on the chart and holding the stock until the trend line is breached is a straightforward strategy for exiting a position.
Develop your sixth sense in trading.
Watch for a bullish Gap in the market to open the trading day, which is followed by more bullish price action later in the trading session.
It's literally a straight uphill climb for the next 30 minutes, with no lookback insight.
While rallies like that come to an end around midday, there are times when a stock price will continue to rise throughout the day.
When trading this strategy, your goal is to eat as much of the gains as humanly possible in the process.
Let's take a look at another Gap and then proceed to setup.
On September 8, 2016 to the present, we will be looking at the 5-minute chart of META Incorporated.
“Simplicity Is The Ultimate Sophistication.” – Leonardo da Vinci
For every up there's a down and as a short seller, we can see this play out again as Meta Platforms Gap bearish confirmed with volume once again on Feb. 2, 2022.
When we draw a red circle around a stock's chart, we are indicating the point at which the stock's uptrend is broken.
However, due to the strength of the trend, a single candle below the trend line cannot be regarded as a valid signal to exit the trade at this point.
This is, of course, highly subjective, so you must have a great deal of self-discipline before attempting to implement such a strategy.
This is why we are waiting for the price of Facebook to break through the swing low established after the most recent high.
Take note that the price eventually broke through this swing low, at which point we decided to close the trade.
#2 – Buy At The Bottom Of The Market In A Gap.
The Gap pullback strategy is one of the most widely used Gap trading strategies in the market today, and for good reason.
It is similar to the Gap and Go strategy in that the Gap is bullish, and you will want to go long on the trade if you see it close to the Gap.
As soon as you move beyond these fundamentals, you will notice that the Two-Gap configurations are quite different.
Prior to receiving a valid Gap pullback buy signal, you must first observe a bullish morning Gap accompanied by high trading volume.
Then you'll need a price pullback with a low volume of trading.
In the case of a valid Gap pullback buy pattern, the pullback move is likely to be reversed somewhere below the midpoint of the Gap.
The expectation is that the stock will then reverse back to its previous day's high and enter a strong bullish trend from that point forward.
The 15-minute chart of Apple for the day of June 28, 2016 is shown above.
Take note of the fact that the trading day begins with a bullish Gap at the first bell. As the stock continues to rise in value, the volume is increasing.
However, the price begins to sag and eventually slips through the mid-point of the Gap, completely filling the space left by the previous price.
Meanwhile, volumes are decreasing as Apple's stock continues to decline. After that, we see a reversal in the trend and an increase in trading volumes.
Is your head spinning yet as a result of the market's recent volatility?
One minute everything is in motion, the next you have no idea where you are or what direction you are going. In trading, this is just the way it is, and the more comfortable you become with accepting uncertainty, the better off you will be in the long run.
The reversal of a pullback is frequently signaled by the formation of a reversal candle pattern on the chart. You may be witnessing the beginning of a new bullish move if you see a bullish candlestick during the pullback period.
Once you have identified reversal points, you will generally want to take a long position in the stock.
A stop-loss order should be placed below the Gap low to protect against further losses. Consequently, you are protected against a false signal entering your trade.
With The Gap Pullback Setups, There Are A Couple Of Potential Pricing Targets.
The first one can be found at the very top of the chasm.
The second larger target can be determined by using Fibonacci Retracement extensions or simply by watching the price movement of the stock.
Consider the following Gap pullback buy strategy to help clarify these points further.
Using the same Apple Chart that we talked about earlier above...
This time, we've included specific trade signals on the chart to help you make decisions. The resistance area formed immediately following the Gap is indicated by the black horizontal line on the image.
Take note of the four candles that have appeared after the gap has been created and are crawling under this level.
The price finally pushed off from this resistance level and closed the gap in the market. As Apple steps in to fill the void, the volume of sales declines significantly.
The chart then shows a Harami Reversal Candle Pattern, which is usually bullish. This suggests that the price action may be about to reverse and of course, it did.
Immediately following the Harami Pattern, the next candle rises above the candle figure, confirming the potential increase.
This candle is used to purchase more shares and then the price begins to rise as a result of this. Put an end to your search for quick fixes for hot trades guys.
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We place a stop-loss order just below the point at which the Gap is at its narrowest.
This is depicted on the chart by the horizontal red image in the middle of the chart.
We can see that AAPL has reached the first target of the pattern, which is the high of the morning Gap, eleven periods after it was established.
The rally then surges past the Gap's previous high.
The trade could then be kept open until the end of the trading session, if necessary.
As depicted on the chart, you can get out of the market a few minutes before the market close.
Strategy for Filling the Gaps in the Morning Reversal
The next Gap approach is to place a trade in the opposite direction of the primary trend in the hopes of closing the Gap.
If the stock price opens with a bullish Gap on the chart, it is possible that the price will fill the Gap with a bearish move later on.
The Gap is most often visible when there is a large amount of trading volume. Following that, the volumes decrease in tandem with the pullback.
Citigroup's 5-minute chart for the day of April 28, 2016 is shown below.
As you can see, the Gap opens with a large volume of trading, but the volume drops off a cliff as the price action begins to trade in a sideways fashion.
This demonstrates the inability of the bears to drive the stock lower in the short term. Following the bearish Gap, we have another small bearish candle to look at.
Because of a decrease in candle volume, the candle appears to be small. The next candle pattern is the well-known hammer reversal candle pattern.
This implies that the price action may revert and close the Gap in the market. The volume of this candle is even lower than the previous one.
The following candle is bullish and breaks through the top of the hammer pattern. This confirms the pattern's reversal potential, and we go into Citigroup.
Our hypothesis is that the price action will begin to move in the opposite direction of the Gap.
Using the hammer, we place a stop-loss order just below the low point of the wave. The price continues to rise, and it is on the verge of reaching the top of the Gap.
However, a small amount of hesitancy prevents the price from reaching our desired level.
After two consolidations, the price rises to the top of the Gap and then begins to decline. With this, we have reached our goal and have closed out our morning reversal Gap-fill trade.
The practice of trading the Gap for a living is a common way to approach the markets first thing in the morning.
After thousands of trades, I've come to the conclusion that buying the pullback provides the best risk-reward ratio.
On the negative side, you may have to sit in the trade for an extended period of time to determine whether or not the stock can actually surpass its previous high.
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