The gap and go strategy is when a stock increases from the previous day’s close price. If you’re looking to do gap trading successfully, the most common strategy is to use a premarket scanner and search for stocks with volume in the premarket. This strategy is a very popular trading strategy among day traders. Every morning, a bunch of gapping stocks hit the premarket scanners. Traders worldwide are watching them like a hawk for potential trading opportunities.
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Basics of the Gap and Go Trading Strategy
If you see a stock with a decent volume premarket and is gapping up over the previous day’s close, this is a potential sign that the stock has room for continuation at the market opening. Sometimes a stock won’t have much premarket volume, and then it gaps up at the open. Gappers don’t always entail a stock needing to have stock volume during the premarket.
A lot of times, gaps happen right at the open, and that’s why it’s important to have a good gap and go scanner like Trade Ideas that hunts for these stocks for you.
Many times the cause of a stock’s premarket volume is due to a news catalyst. However, sometimes a stock will gap up on a technical breakout without news.
Be careful trading stocks that are gaping up without a news catalyst. It’s ok to trade them but ensure proper trading risk management strategies. Be careful of the g&g strategy when this happens.
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What Does Gap Up and Gap Down Mean?
A gap up means the stock price opens higher than the previous close. Alternatively, a gap down means the stock price opens lower than the previous close. You can scan the premarket for gaping stocks using a scanner.
How Do You Know If a Stock Will Gap Up?
The best way to know if a stock will gap up is to use a stock scanner. I suggest you scan the premarket each morning for stocks with a minimum gap-up of 3% and a premarket volume of 100,000+. Then, filter and look for any stocks that have a news catalyst. Why? Stocks with premarket volume and a news catalyst have a good chance of gapping up at open!
The stock goes from red on the day to green, hence the term red to green. You could also use gaps as an options trading strategy as well.
When a stock goes red to green, it’s a potential sign that it may continue a move upwards. So traders pay close attention to red-to-green moves.
Check out the wonderful gap-up on $SPY. First, the price action established and found a resistance zone. Then it went GOOOOOO!!!!
How to Trade Gaps Successfully
In the g&g strategy picture above, you’ll see that $TOUR gaped up at the open with no premarket volume. There was a tiny little gray hammer right before the open, but other than that, nothing.
Then the stock gaped over the previous day’s close (orange dotted line) at open. After, it trended along the 9 ema (blue line) until it closed below it around 12:45 pm.
If you got a good entry on a pullback to the 9 ema on the green candle (entry) below, you could have rode the 9 ema until you got your 1st candle close below the 9 ema.
You would have sold at this point. You would have made more money if you sold at the top red warning candle. However, you would have made over $1.00 per share using the ride the 9 gap and go strategy.
In the gaps strategy picture above, you’ll see that $DCIX had a lot of premarket volume. As a result, it was gaping up over the previous close line (orange dots).
Then, at the open, it had a HUGE pump, dumping throughout the rest of the day—a perfect example of pump and dump stocks.
Gap trading is typically used for day trading strategies but could also be used as an entry for swing trading strategies. For example, suppose you want to learn how to trade gaps successfully using swing trading. In that case, the Ichimoku cloud trading system is a popular swing trading strategy if you want to hold your position longer.
Another popular strategy is trading red to green move stocks if you want to trade this strategy successfully. Red to green moves happen when a stock crosses above the previous day’s close price after trading below it intraday.
Analysis in the Premarket
There are several different types of gap strategy types. Some have a lot of premarket volume, others have little, and others have none.
This is why having a great scanner like Trade Ideas is critical, which helps you find gappers. We use the Trade Ideas scanner every day to scan the premarket.
Then, we watch their high-of-day momo scanner at the market open. Trade Ideas has never failed us yet. We rely heavily every day on their scanner!
A lot of times, the gappers that you’re watching will dump at the open. So it presents a great opportunity to dip buy when these stocks sell-off.
When we see a stock running before the market opens, we typically expect a gap and go strategy to play out.
However, wait for confirmation. Ensure it’s not gapping only to fall when the bell rings at 9:30. Many gaps pull back or find a range before breaking out and going higher.
Watch for a good support level, then buy the dip.
Can You Guess or YOLO?
This strategy can allow you to make a larger profit if you get it correct. But can you guess when a gap will occur?
Not really. Sometimes when a stock has great earnings and moves are made after hours and premarket, the stock is opened with a gap up.
As a result, you’d have to guess the earnings direction correctly. But playing earnings is risky. Think of it like a football passing play.
Your team needs 10 yards to pick up the first down. But the defense has played the run perfectly. So you’re going with a passing play.
However, it would be best to have the pocket to hold up, the receivers to separate, have sure hands, and make the catch. As a result, you need everything to work to get the positive play.
To guess this strategy, you need everything to go correctly. The gap strategy can go either bullish or bearish. If you want to build wealth, you must not yolo your money in the market.
Do Gaps Always Get Filled?
There’s a saying in the stock market that gaps always get filled, but is that true? No, it’s not always true. However, the likelihood of a gap getting filled is really good. Gaps up and down provide very targeted support and resistance levels, and it’s more likely, a gap will be filled on a chart eventually.
Bullish and Bearish Gaps
This strategy is both bearish and bullish. The stock can gap up or down. Hence the danger that can occur if you guess wrong.
For example, Tesla posted earnings in November of 2017. The previous day it had been red, with the stock falling about $10.
It closed the day at a strong support level. There was no indication that the stock wouldn’t hit its earnings mark and bounce up off of support. Hence why playing the gap and go at earnings can be extremely risky.
However, this play paid off. Price gapped down on earnings, and anyone who’d shorted or played put options got rewarded.
Amazon had a major bullish g&g with earnings in October of 2017—the previous day before, earnings had been bearish. Price was tangled in the moving averages.
However, once earnings happened, the price gapped up majorly. As a result, anyone trading stocks or options with a bullish bias was greatly rewarded that day.
Why It Is Risky at Earnings
In the examples above, those were gaps that worked. However, people don’t realize the risk of trading earnings.
People have blown up trading accounts trying to trade earnings correctly. It’s frustrating when a stock has good earnings, and you expect it to go up, only to have the price fall at the market open.
There’s no 100% foolproof way of knowing what a stock will do. If only it were that easy, right? If it were, we’d all be rolling in the dough.
Then the majority of traders wouldn’t give up. It would be best to have discipline, patience, and proper risk management to succeed at trading.
Float
We use scanners with gap settings in place. As a result, we can find the potential g&g strategy setting up.
Our scanner of choice is the Trade Ideas premarket scanner. We like to search for stocks gaping at least 3% if the stock has a high % short float…even better!
We look for a low float under 20 million and ideally have a news catalyst. A news catalyst isn’t critical. However, it does carry a lot of weight to a stock’s potential movement and credibility. Sometimes the news hits the day before and continues with that momentum from the day before. Gapping stocks are fun to trade. It would be best if you had practice.
If you’d like to learn more about Trade Ideas and purchase their scanner, please read our Trade Ideas Review! Then, enter BULLISHBEARS15 (all caps) at checkout to receive your one-time 15% discount.
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