Significant Gaps - Make Money Trading

Mastery Series Significant Gaps

Significant Gaps

This Lesson:• Significant vs. Insignificant gaps

• Rating significant gaps

• Finding significant gaps

• Gap impacts on indicators

• Trade Setups with Gaps

Significant vs. insignificant gapsSignificant gaps are unique

• Reflect shock value

• Sudden imbalance of price

• Leads to emotional and irrational action

• Change the landscape of the patterns

• Reflect stocks that are in play

Questions to consider

• Where is the stock gapping from?

• Where is it gapping to?

• Is the gap clearing supply/demand?

• Are traders “trapped” in the recent short term?

• Is volume greater than average?

• What are the indices doing?

• Is there a void ahead?


Two types of significant gaps:

• Professional Gaps

• Amateur Gaps

Professional Gaps

• Has a greater probability of continuing in the direction of the gap.

• Applies to day of gap and short/intermediate move immediately following gap.

• Provides a very high probability trade setup for both daytrading and swing trading.

Amateur Gap

• Has greater probability of moving in the opposite directionof the gap.

• Applies to day of gap and short/intermediate move immediately following gap.

• Provides a very high probability trade setup for both day trading and swing trading.

How To Rate Significant GapsSignificant gaps leave clues:

• Point 1 - Location

• Point 2 - Short term pattern

• Point 3 - Long term pattern

• Point 4 - Relative strength/weakness

• Point 5 - Volume

• Point 6 - Void

You do not need a bunch of fancy names for gaps. A gap is either professional or

amateur. Keep it simple.


Point 1 - Location

• Gaps just above an area of old supply/new demand (pivot point) on daily chart

• Should be less than 8-10% from pivot point

• Check multiple time frames

• Identify relevant supply/demand areas


Point 2 - Short Term PatternA Bollinger squeeze

• Did the following short term setup occur:

✓Yesterday was a wide range bar (WRB)

✓There are no long upper or lower shadows

✓Higher than normal volume (trap)

[OR]

✓Last 5 days were in a base/consolidation

• Consult Multiple time frames for guidance


Point 3 - Long Term Pattern

• The daily chart is in a trend but today’s gap reversed or ended the trend

• Daily chart is in uptrend (not extended) or was in a consolidation or base and today’s gap opens over the base

[OR]

• Gap is over a daily sell setup on daily chart


Point 4 - Relative Strength/Weakness

• Stock is gapping up while market is gapping down (relative strength)

• Stock is gapping down while market is gapping up (relative weakness)

• Stock is gapping up or down while market is opening flat

• Market is gapping down while stock is gapping up (or the reverse)


Point 5 - Volume

• Want decent pre-market volume (50,000+)

• Want stocks that have average daily volume of 1 million+

• Focus on above average volume


Point 6 - Void

• Minimum of 3:1 reward/risk to next area of supply or demand on chart (void)

• The bigger the void the better

• The profit opportunity is the area from old supply, now new demand, to the next area of supply (the void)


A professional gap can not be:

• An American Depository Receipt

• An issue that trades 24 hour markets (gld/slv)

• Gapping due to a buyout

• A stock with a daily chart that is “a mess”

• (lots of choppiness, long shadows etc)


Key Factors To Consider

• Is there a reasonable spread between the bid and the ask?

• Don’t ask “why” - it’s not important. The why of the gap has already been factored in

• Gaps remove the need to clutter charts with indicators

• Price is only leading factor

• By the time a lagging indicator catches the price on a significant gap, the move hasalready happened

• Focus on price and Supply/Demand

• You need pre-market data for day trading gaps


How To Find Significant gapsFree Resources

• www.nasdaq.com

• www.finviz.com

• www.thestockmarketwatch.com

• Your Trading software:

‣TradeStation

‣Think or Swim

‣ Interactive Brokers etc


Simple Setup to trade gapsTrading Intra-day Gaps

• Identify & mark the demand/supply areas prior to gap day

• Identify & market pre-market demand/supply areas

• Rate the gap using the 5 simple steps

• Look for the wide range bars with increased volume

• Make sure the stock fits your trading plan:

• Stock price & bid/ask spread

• Sufficient 3:1 reward to risk

• Pre-plan your trade ideas before the market opens

Pull Back Trade Setup

• Quality trade setup - Buy or short @ supply or demand

• Focus on top 2-3 best gaps you identified pre-market

• Watch for wide range bars to form

• Look for a 2-3 bar clean (small wicks) pullback into 40% of wide

• Trade at or near reversal times from a 5 or 15 minute charts

• Confirm target to next supply area is greater than 3:1

• Hunt for a reversal candle - such as an engulfing or doji

• Buy above reversal candle and place stop below reversal candle

Significant Gaps - Make Money Trading

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