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stock trading strategies: Gap


Gap is a popular stock trading strategy among the traders. Some stock traders only trade gap. Three types of gap played by traders. They are Breakaway gap, Common gap, exhaustion gap. Every gap has its special characters and has defined rules how to play them.

what is gap trading/ what is gapping

Gapping or gap trading is a technical analysis based on stock charts where stock open up either above the previous day close or below the previous day close. When stock open up above the previous day close, this gapping is known as gap up stock. On the other hand, when stock open up below the previous day close, this gapping is known as gap down stock.

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Breakaway Gap

The breakaway gap is defined as the stock gap up with big volume after consolidation. Longer the consolidation, better the breakaway gap and less risky. Among the three types of gap, this gap is the most popular day trading strategies among stock traders.

Why gap happen in stock market

Gap occurred by the events that change the outlook about the company among the institutional investor, pop trading firm, hedge fund. Usually this gap happens for the following reasons:
1. Company beat the EPS with high Margin
2. Company enter into new big market
3. Pharmaceutical company gets FDA Approval
4. Company announces a new innovative product
5. Company bought the competitor
6. Another company bought any existing company
7. Company stared to produce highly innovative product
8. Company will be benefited by government new initiative

How to get sign for breakaway Gap or breakout stocks

This is really difficult to trace the company before breakaway gap . But we see some characteristics among the stocks before breakaway. They are as follows:
1. Stock has very low volatility i.e. stock does not move too much in a single day.
2. Volume become very low or below the moving average
3. Stock tends to hovering around a major pivot point.
4. Stock tend to close each day in a tight range. In other words, candle started to close within the previous day’s candle

How to confirm the Breakout Gap in stock market trading

Professional trader wait for the confirmation of the breakout. In the breakout day stock most of the time shows certain characteristics. These characteristics are :
1. Volume must be greater than the average volume. Higher the volume, better the breakout.
2. Stock tends to open above the immediate pivot point.
3. Stock test the immediate pivot point

How to  Trade breakout stocks

Professional trader wait for the first opening hour of the market. After the first hour, if stock hold the opening range and break the high of the opening range, buy the stock above the 5 cents of first hourly high and hold the stock until it hit the stop loss.

How to put the stop loss in breakout  stock

M1 Finance

Stop loss depends on the confidence of the trader and we see three types of stock trading strategies for stop loss.
If trader is highly confidence of the trade, he can put the stop below the previous pivot point. If he is confident about the trade, he can put the stop loss fill of the gap. If he is moderately confidence, he should put stop loss below the opening of the breakout candle. If he is not confident, he should not take this trade and wait for another good trade.
However, if trader miss the trade in the breakout day, but think or confident that stock will make big move from this break out, he can take the trade next day as stock break the previous day’s high and stop loss should be the same. This is another gap trading strategy for stock.
If trader miss the trade even next day, he should wait for little pullback, after pullback he should enter into the trade comfortably and should have plan to hold it long time.

Day trading strategies for Apple GAP/ Break out Trade setup

(Click to enlarge)


apple stock gap trading

Now we will discuss the breakaway gap of apple. Before the break away gap up,  apple stock was trading on the narrow range and all the bar is very small range. This means stock was consolidated before the big break out. We also see volume is below the 50 day moving average. That is another indication that stock is trying to break.

Third, we see apple stock opens at the high of previous pivot point and holding that point indicates the strength of the move. Stock break out with big volume clearly indicates the break away gap or breakout.


Day trading strategies for FB Gap :


(Click to Enlarge)

Gap Trading Stratagies

In the Facebook charts, We see the different types break away gap entry and exit strategy. First entry is the opening price of the stock. If stock gaps up and comes down little bit and again come to the opening price that entry is really strong.

Psychology behind this kind of entry is that after gap up, some traders think stock gaps up too much, they tried to short the stock and pushed down the stock little bit. Then another group of buyer comes to the market and pushed up the price above the opening price. Now short trader are out from the market and new group of buyer enter the market after seeing the stock strength. All the buyer pushed up the stock pushed up the price further. This is very good day trading strategy for gap.
Second entry is after stock close above high of the breakout day price. The reason behind this is after big break out day stock tend to stop moving or try to pull back. However, as the stock break the high of the break out day candle, signal is completely changed. Now stock shows new strength. That means another group of buyer is started to buy stock and no big seller in the market.

Exit Strategy FB Stock

we see in the charts 3 exits strategy. First stock trading exit is the low of the break out day or when stock breaks the opening price. Reasons behind this is that sometime fake break out happens. One of the signs of the fake break out is as stock goes down to the opening price, it cannot achieve the opening price any more. That’s why this exit is important.
Second exit is close of the gap.  Stock trading strategies behind this exit is sometimes after break out stock tends to move down little bit, then stock started to move its direction. If buyer put stops in the opening price, he will stopped out with  loss. But this exit will help trader to say in the position without taking any loss and exit the stock after big gain.
Third Strategy is place stop below the pivot point. This kind of stop buyer should use when he has lot of confidence about the stock.

Bottom Line

Gap  is highly profitable as stock trading strategy if buyer enter the trade  with  right setup. However, one should be careful before enter into the stock market trades because sometimes

NOTICE: This article was based on research of stock market information and other sources of information, found both online and in print media. Neither nor any of its owners, contributors, officers, directors, consultants, or employees take responsibility for the accuracy of the information contained in this article or the accuracy of the information on which this article was based. was not compensated by any of the companies mentioned in this article for the preparation of this material, nor were the materials approved by the companies which were mentioned.
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