11/22/2023 0 Comments Stock gap fill strategy![]() ![]() something every trader should strive for. The advantage is that you can sometimes make big profits, quickly, and with a little less risk. Gaps can provide nice swing trading profits but they can be a little more tricky to trade. Well, there you have it.a short primer on trading gaps. These types of gap plays usually provide great opportunities because they represent and extreme price move. If a stock gaps down after a wave of selling has already occurred, these are amateurs selling the stock - look to go long.If a stock gaps up after a wave of buying has already occurred, these are amateurs buying the stock - look to short.They sold after an already extended move to the downside. ![]() See how this stock gapped down after a wave of selling occurred? These amateur traders got emotionally involved in the stock. Notice how the stock eventually did go back up - but only after a wave of selling occurred (professional buying). These traders eventually lost money as the stock sold off over the next few weeks. They piled in after an already extended move to the upside. See how this stock gapped up after a wave of buying occurred? These amateur traders got emotionally involved in the stock. Here is an example of a gap caused by amateur traders. They sell after a wave of buying has occurred.Īmateur traders do the exact opposite! They see a stock advancing in price and are afraid that they will miss out on the move, so they pile in - just when the pro's are getting ready to sell. Professional traders buy after a wave of selling has occurred. To figure this out you have to understand this one important concept first. Was this gap caused by the professional traders that do not make emotional decisions? Was this gap caused by the amateur traders buying or selling based on emotion? When you are looking at gaps on a stock chart, the most important thing that you want to know is this: Ok, now we are going to get into the really good stuff. Exhaustion Gaps - This type of gap occurs in the direction of the prevailing trend and represents the final surge of buying or selling interest before a major trend change.Continuation Gaps - Sometimes called runaway gaps or measuring gaps, these occur during a strong advance in price.A stock will be trading sideways and then all of sudden it will "gap away" from the price pattern. Breakaway Gaps - This type usually occurs after a consolidation or some other price pattern.It isn't really necessary to memorize all of these patterns but here is the breakdown so that you can impress your trading friends. Traders have labeled gaps depending on where it shows up on a chart. So I really don't even think it is worth debating because it offer no edge one way or another! Types of gaps Some gaps never get filled, and sometimes it can take years to fill a gap. Sometimes you will hear traders saying that "gaps always get filled". A few days later it rallied back up and filled in the price level at which there were previously no trades. In this example, you can see that the stock gapped down. They are talking about a stock that has traded at the price level of a previous gap. When we say that a stock is "filling a gap", the Japanese would say that the stock is "closing the window". In Japanese Candlestick Charting gaps are referred to as windows. Sometimes you will hear traders say that a stock is "filling a gap" or they might say that a stock has "a gap to fill".Īre you wondering what the heck they are talking about? You can see on the chart above that the stock closed at one price and then the next day the stock "gapped up" creating a price void on the chart (yellow circle). Since there were no trades between $26.57 and $27.60 this will create a gap on the chart. They report higher than expect earnings that causes excitement among investors. After the close they come out with their earnings report. Let's say that on Tuesday, Microsoft closes at $26.57. Why would this happen? This happens because buy or sell orders are placed before the open that cause the price to open higher or lower than the previous day's close. These can occur in all time frames but, for swing trading, we are mostly concerned with the daily chart.Ī gap on a daily chart happens when the stock closes at one price but opens the following day at a different price. What is a gap?Ī gap is defined as a price level on a chart where no trading occurred. You have to be able to identify if the gap is caused by professional traders or amateur traders. There are really only two significant factors to consider when trading gaps. ![]()
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