4 Types of Gaps and How to Trade Them

Trading gaps is extremely profitable, especially for traders with strategies for gapping up and strategies for gapping down. Some traders only take one side of each gap, but learning to trade the gaps up and down proves to be doubly profitable. It’s hard to trade the gaps intraday, on a short term chart, but can be done. For the swing trader, there is much more money to be made in gaps.

This article will discuss how to generate profits with gap trading and give a few proven strategies on the topic. Very little technical analysis is needed here. This works with any trading instrument, from stocks and currencies to emini futures.

Full gap up

The full gap up occurs when the new bar, whether a new day or even a new minute bar, opens completely above the previous bar. This full gap is very powerful, both as a bullish signal and for future support and resistance lines. The full gap up should be traded with trading goals in mind, but after a few hours into a new daily trading session, a buy order should be put in slightly higher than the current high bar price. Pending a breakout, the large money will be made when the stock goes higher than the current high. When this happens, the market moves wildly upward and produces very nice profits.

Full gap down

The full gap down can happen for a variety of reasons, but is usually due to a catalyst appearing as the market is closed. Negative news, low earnings, bad economic forecasts and other events usually persuade the market to push down prices. A full gap down also works as strong support and resistance and could possibly be confirmed with the use of technical analysis or your own custom indicators. Set up a position just slightly above yesterday’s low; this is where the support and resistance will break and the market will rally. For better results, confirming with technical analysis will improve accuracy.

Partial gap up

This occurs when the open price is higher than yesterday’s close, but not higher than yesterday’s high. Partial gaps are more dangerous to trade because they don’t show the strength of full gaps, and they are not as profitable with strategies for gapping up or down. Just like the full gap up, look for the intraday high achieved early in the session and place a limit order just above it. A rally will bring in the profits.

Partial gap down

Partial gap downs should be traded with strategies for gapping down. After the early trading session, set a limit order just below the low achieved in the session. This is where support is the strongest and your trade will be placed in an area loaded with sellers. Strong shorting occurs here. Confirming with technical analysis is never a bad idea.

Learn how to master day trading by downloading two of Trading EveryDay’s FREE products: Tools of the Trade eBook and a Trading Plan Planner. Dedicated to helping people become profitable traders, Leroy Rushing, a professional day trader, trading coach, and author, is the CEO of Trading EveryDay, a distinguished provider of educational trading products and services.

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