Gap and Go Strategy
The gap and go strategy is when a stock gaps up 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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What to Know About the Gap and Go Strategy
If you see a stock that has decent volume premarket and is gapping up over the previous days close then this is a potential sign that the stock has room for continuation at the market open. Sometimes a stock won’t have much premarket volume at all 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 of times the cause of a stocks premarket volume is due to a news catalyst. 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 make sure that you have your proper trading risk management strategies in place. 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 that the price of the stock opens higher than previous close. Alternatively, a gap down means that the price of the stock opens lower than previous close. You can scan pre-market for gaping stocks using a scanner.
How Do You Know If a Stock Will Gap Up?
Without a doubt, the best way to know if a stock will gap up is to use a stock scanner. I suggest you scan the pre market each morning for stocks with a minimum gap-up of 3% and a premarket volume of 100,000+. Filter and look for any stocks that have a news catalyst. Why? Stocks that have premarket volume and a news catalyst have a good chance of gapping up at open!
The stock goes from being red on the day to green, hence the term red to green. You could also use gaps as an option trading strategy as well.
When a stock goes red to green it’s a potential sign that it may continue a move upwards. Traders pay close attention to red to green moves.
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 up over the previous days close (orange dotted line) at open. After, it trended along the 9 ema (blue line) until it closed below it around 12:45pm.
If you got a good entry on a pullback to the 9 ema on the green candle (entry) below then 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 though. 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. It was really gaping up over the previous close line (orange dots).
Then, at the open it had a HUGE pump and then it dumped throughout the rest of the day. Perfect example of pump and dump stocks.
Gap trading is typically used for day trading strategies but it could be used as an entry for swing trading strategies as well. If you’re looking to learn how to trade gaps successfully using swing trading then the Ichimoku cloud trading system is a very popular swing trading strategy if you want to hold your position a bit longer.
If you’re looking for how trade this strategy successfully then another popular strategy is trading red to green move stocks. Red to green moves happen when a stock crosses above the previous days 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 a little bit and many others have no premarket volume at all.
This is why it’s absolutely critical to have a great scanner like Trade Ideas which helps you to find gappers. We use 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. It presents a great opportunity to dip buy when these stocks sell off.
In fact, 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. Make sure it’s not gapping only to fall when the bell rings at 9:30. A lot of 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 that can allow you to make a larger profit if you get it correct. Can you guess when a gap will occur?
Not really. Sometimes when a stock has great earnings and moves are made after hours and pre-market, then the stock is opened with a gap up.
As a result, you’d have to correctly guess the earnings direction. 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, you need the pocket to hold up, the receivers to separation as well as have sure hands and make the catch. As a result, you need everything to work to get the positive play.
In order 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 need to 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 than not that 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 had been a red day where the stock had fallen about $10.
It closed the day at a strong support level. There was no indication that the stock wouldn’t hit their 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 a bearish one. Price was tangled in the moving averages.
However, once earnings happened, price gapped up majorly. Anyone trading stocks or options with a bullish bias were rewarded a lot 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.
In fact, people have blown up trading accounts trying to correctly trade earnings. It’s frustrating when a stock has good earnings and you expect it to go up, only to have price fall at the market open.
There’s no 100% fool proof way of knowing what a stock is going to do. If only it were that easy right? If it was, we’d all be rolling in the dough.
Then the majority of traders wouldn’t give up. In order to succeed at trading, you need discipline, patience and proper risk management.
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 that are gaping up 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 stocks potential movement and credibility. Sometimes the news hit the day before, and is just in continuation with that momentum from the day before. Gapping stocks are fun to trade. You just need practice.
If you’d like to learn more about Trade Ideas and would like to purchase their scanner then feel free to read our Trade Ideas Review! Enter BULLISHBEARS15 (all caps) at checkout to receive your one-time 15% discount.
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