Gap trading is heavily used by day traders and swing traders. It’s a type of trading that involves buying or selling a stock that has opened at a price significantly higher or lower than its previous close. Gaps can occur for a variety of reasons, such as news announcements, earnings, or massive capital inflow and outflow.
There are two main types of gap trading strategies:
1. Breakout gap trading: This strategy involves buying a stock that has gapped up on strong news or an earnings beat. The goal is to ride the momentum of the stock as it continues to rise in price. The goal is to profit from the coming decline in the stock’s price.
However, there are exceptions for gap up stocks: when the price break up the highest point of gap candle, and there is high volume showing at the same time, the stock price would probably rise further.
2. Breakdown gap trading: This strategy involves selling a stock that has gapped down on bad news or an earnings miss. The goal is to ride the stock bounce back
Gap trading can be a risky strategy, but it can also be very profitable. It is important to do your research and understand the risks involved before you start trading.
Here are some tips for gap trading:
- Only trade stocks that you are familiar with. This will help you make informed decisions about when to buy and sell. That’s to say: use fundamental analysis to choose what stock to trade, and use technical to choose when to trade.
- Use a stop-loss order to protect your profits. This will automatically sell your stock if it falls below a certain price.
- Be patient. Gap trading can be risky, so don’t expect to make money every time you trade.
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