Down gaps are my favorite because they can lead to big drops. What do YOU think about gap trading? The simplest method for determining your own ability to successfully trade gaps is to paper trade. The process for a long entry is the same for Full Gaps in that one revisits the 1-minute chart after If you are not a member yet, click here to join the Rockwell Trading Club today. It has been cut down and sawed into little pieces. Kirk founded Option Alpha in early and currently serves as the Head Trader.
Overall, with options trading, you have many options (pun intended). Thus, for options trading on gaps, I’m going to lay out the major options strategies available to you. Read the following for a list of strategies useful in options trading.
Why Use Trading Rules?
I trade a Gap and Go! Everyday I start the same way. Once I have found the stocks already moving I search for a catalyst. Only after confirming the catalyst I will begin to look for an entry. My Gap and Go! Strategy is very similar to my Momentum Day Trading Strategy. The difference is that the Gap and Go!
Strategy is specifically for trades between 9: I look for the quick and easy trades right as the market opens. In our Day Trade Courses we will teach you the ins and outs of this strategy.
Always look for low float stocks. These will have home run potential written all over them. For example, if a stock gaps up on some speculative report, experienced traders may fade the gap by shorting the stock. Lastly, traders might buy when the price level reaches the prior support after the gap has been filled.
An example of this strategy is outlined below. To tie these ideas together, let's look at a basic gap trading system developed for the forex market. Here are the rules:. Because the forex market is a hour market it is open 24 hours a day from 5: We can see there is little support below the gap, until the prior support where we buy.
This will give you an idea of where different open trades stand. If you see high-volume resistance preventing a gap from being filled, then double-check the premise of your trade and consider not trading it if you are not completely certain it is correct. Second, be sure the rally is over. Irrational exuberance is not necessarily immediately corrected by the market.
Sometimes stocks can rise for years at extremely high valuations and trade high on rumors, without a correction. Be sure to wait for declining and negative volume before taking a position. Last, always be sure to use a stop-loss when trading. Remember, gaps are risky due to low liquidity and high volatility , but if properly traded, they offer opportunities for quick profits. Gap Basics Gaps occur because of underlying fundamental or technical factors. Gaps can be classified into four groups: Breakaway gaps occur at the end of a price pattern and signal the beginning of a new trend.
Exhaustion gaps occur near the end of a price pattern and signal a final attempt to hit new highs or lows. Common gaps cannot be placed in a price pattern — they simply represent an area where the price has gapped. Continuation gaps occur in the middle of a price pattern and signal a rush of buyers or sellers who share a common belief in the underlying stock's future direction.
These fills are quite common and occur because of the following: The initial spike may have been overly optimistic or pessimistic, therefore inviting a correction. When a price moves up or down sharply, it doesn't leave behind any support or resistance. For related reading, see: What are the main differences between exhaustion gaps and breakaway gaps?
Here are the key things you will want to remember when trading gaps: Once a stock has started to fill the gap, it will rarely stop, because there is often no immediate support or resistance. Exhaustion gaps and continuation gaps predict the price moving in two different directions — be sure you correctly classify the gap you are going to play. Be sure to watch the volume.
Intrinsic Value and Option Trading: For in-the-money call options, intrinsic value is the difference between the stock price and the read more Option Exercise Price: An option exercise price is the price level where the option starts to take on intrinsic value. GAPS; The 'Forgotten' Trading System That is RIGHT % of the Time DISCLAIMER: Futures and options trading involves substantial risk of loss and is not suitable for every investor. The compliment your Gap trading, always keeping you on the right side of the market. Allowing you to operate with a much tighter stop, improving your. Beginning traders were probably shocked the first time they experienced a stock price gap. I guess even the most experienced traders still get taken back when there is an unexpected stock price gap in a stock they are trading.