HOW TO TRADE GAP DOWN PATTERNS

  • March 27, 2018

Watch our video on how to trade gap down patterns.

Gap down patterns can be found on many stock charts. The gap down pattern occur when price opens lower than the previous day's close. Gaps are seen as key levels of support and resistance hence you need to pay attention. Watch our video above to learn more about gaps.

Gaps occur because of trader emotions. Trading emotions are where Japanese candlesticks patterns come from. Greed and fear move markets. Candlesticks are a way we, as traders, can gauge the emotional pulse of the market (take our free stock trading courses and you'll learn how to read the stock market).

GAP DOWN PATTERNS

They are also known as falling windows. They're bearish. Gappers are blank windows that form because after hours and pre-market had something happen that caused price to open lower than the previous days close.

Selling power was pretty extreme in the after hours and pre-market trading causing supply and demand to go out of balance. Gappers let you know that a traders view has changed overnight.

News can move markets as well as earnings when stock trading. Earnings reports come out after market close. Sometimes even with good earnings a stock can gap down.

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gap down patterns

GAP DOWN PATTERNS & SUPPORT AND RESISTANCE

Using the gappers strategy as key levels of support and resistance is something you'll notice a lot of traders do.They will get filled. It might not be right away but gaps do fill.

If you've ever looked at gaps on a chart, then you'll notice that the two candlesticks that form the gap also act as support and resistance. When a gapper occurs the overall perception at that time is a bearish one.

The bulls will come in and try to fill that gap but it may take awhile to happen. So be aware of the key levels of support and resistance that gap provides.

gap down patterns

NFLX had an earnings report that caused a falling window. For the next few weeks and months, you'll notice that Netflix traded within those key areas of support and resistance trying to fill the gap. There were a lot of doji candlesticks which tell you of indecision. Coupled with some bullish candlesticks to form bull flag patterns before breaking resistance to head upwards.

TIME FRAMES

Gappers are easier to find on daily charts although the can be found on any time frame. It's easier to form gaps on a day to day basis than it is any other time frame.

You can find them on intraday charts also but they're more indicative of how a trader feels about a stock on a daily chart. Gaps are much more rare on weekly and monthly charts.

A weekly chart can only have a gap when Monday opens lower than the previous Friday and then proceeds to trade lower the rest of the week. A monthly chart would be when a month begins lower than the previous months close and stays that way.

When there are gaps on thinly traded stocks, that is more indicative of normal volatility than a trader's view on the stock. Those are much riskier to trade and should be avoided. Learn how to make money in the stock market for beginners.

USING TECHNICAL ANALYSIS

Gappers form key levels of support and resistance. That's why being able to read candlesticks is so important. The wicks and real bodies form those important levels.

Technical analysis such as moving averages, MACD and RSI are important when a stock is trading in a gap. They can help you determine the direction it's heading, whether up or down.

Moving averages such as the simple moving average formula can also form important buy and sell signals. All of these tools are used to paint a picture of trends and direction; including gap down patterns. Bookmark our penny stock list page for our daily watch lists.
gap down patterns

This chart for AAPL shows another gap down at earnings. The bearish candlesticks moved away from the moving average lines but then came back to test them. They finally broke the resistance of the moving averages to head back into the gap channel to fill it. But the resistance proved to much for it for a few months.

USING PATTERNS WITHIN THE PATTERNS

Candlesticks group together to form patterns over a period of time. Candles such as bearish candlesticks coupled with other candles form patterns that traders are very aware of.

Traders are creatures of habit and will always trade patterns along with support and resistance. Candles tell a story. However, when coupled with patterns and technical indicators, paint a much clearer picture. Take our free online trading courses.

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