Gaps like everything else comes in groups or categories.
1. Common Gap is not as strong of a trade. These happen daily on all charts. The open of the current day is different from the close of the day before but only the body of the candle gaps. These are not significant for trades.
2.Breakaway Gap gives a stronger signal since the space including wicks between the current candle and the candle before has space between them without any wicks filling the space. These are stronger signals when they occur above/below support and resistance (moving averages, Fibonacci, consolidation pattern).
- Runaway/Continuation Gap is a gap that occurs in the middle of a trend.
- Exhaustion Gap happens near the end of a trend or run. The candle closes with a small body.
Gap open and close price points create a support and resistance area.
Why do stocks gap?
Daily Gaps (Common Gap)– More buyers than sellers or more sellers than buyers creating an imbalance of traders.
News Gaps – happen on events such as economic reports, company earnings, new products, patents, etc. These have a higher likelihood of filling the gap or partially filling the gap if they have gapped too far. These make great trades.
One way to trade a news gap is a strangle. A strangle is opening two orders – one long and one short. Whichever order gets filled; the other order gets cancelled. Always have a stop exit order and a target in mind so you can manage this trade properly.
Gap n Go is a gap on news that is greater than 4% movement. This is usually a stock that will gap 4% or more and continue moving in the same direction as the gap. If the gap is less than 4%; the gap gets filled most of the time or half filled. There will always be stocks that do not fit these rules. Gap n Go trades are typically entered within the first 10-15 minutes of the trading session and are day trades.
This is the kind of education you receive in Trading U by Wealth Builders HQ.