How to Trade Gaps

If done correctly trading gaps can be a very profitable and easy way to bank of the stock market. This method is popularly used by swing traders.

What is a Gap?

At its core, a gap is defined by a stock’s price essentially jumping up or down from the current value. A common place to experience a gap in a stock’s price is between the closing of one market day to the opening of the next. This happens because buy or sell orders are placed before the open which causes the price to open higher or lower than the previous day’s close.

Example: Stock X closed on Monday at $47.07, but they reported great earnings after the market closed. Suddenly an influx of buy orders are placed for Stock X between Monday closing and Tuesday morning. Once the market opens Tuesday the price has suddenly jumped to $48.58.

Another popular gap time is when a company has recently been bought. Usually the company has been purchased at a premium (meaning higher than the actual stock price), which causes the price to gap up higher.

Problems with Gaps

While gaps can be a good thing, they also usually don’t come with any type of plausible support. Many times you will see a stock gap high followed by eventually profit-taking and other type of selling, which may cause the stock to drop back down to where it first gapped.

Important Notes and Reminders

• Be weary about entering a stock after it has already gapped.
• Gaps created by emotion are more likely to recover back to normal price; Gaps caused by factual data are more likely to stabilize where they are.