HOW TO TRADE GAP UP PATTERNS

  • March 23, 2018

Watch our video on how to trade gap up patterns.

So whats the deal with gap up patterns? These types of setups occur many times in chart patterns. The gap up pattern happens when the closing price of a stock drastically changes from the opening price of the next day. The opening price of the next candle gaps up. Watch our video above to learn more about gaps.

Gaps occur when there isn't any trading happening. Normally after hours and pre market. After hours and premarket traders push price up or down.

The world received Japanese candlesticks patterns from rice trader Homma. His realization of emotion and price movement led him to developing the candlestick system (take our free courses and you'll learn how to read the market).

GAP UP PATTERNS

Gap up patterns are also known as rising windows. These trading gaps are considered bullish because of the move up in price. A lot of gaps happen during earnings. Earnings reports are given after the market closes.

Usually an earnings report that has high earnings generates a lot of interest and thus volume (bullish buying at the ask). There's a lot of demand the next day for the stock causing the printed price, and the ask to rise.

As long as it stays above the previous days low, then the window patterns form. Gaps tell you something happened to the psychology of traders that resulted in that move. 

Gap Up Patterns

GAP UP PATTERNS

Gap up Patterns are something that we look for and analyze each morning in our trade room. We use trade ideas to scan the pre-market, look at the various patterns, support and resistance levels and discuss the trade setups with the Bullish Bears Team and our members.

These types of trading setups are particularly a favorite of day traders because of their volatility and opportunity to trade a large position quickly and efficiently using hotkeys. 

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When looking for Gappers, consider the why. Is it gaping on a buyout or buyout rumor news? Or maybe a technical low support level was hit in the premarket and shorts decided to cover in mass and take their short selling profits. Perhaps Buffet bought a large position months ago and news has just come out about his bullishness on the stock.

Whatever the reason, it’s important to know the why. This can help you discover if the momentum may continue. We recommend Benzinga Pro for getting the breaking news on gap up patterns and much more as fast as possible and in an easily digestible format.
gap up patterns

NFLX posted very good earnings causing the stock to gap up the next day. Traders were excited by the earnings report causing the demand of the stock to increase. Which, in this case, caused the price to gap up and go.

TIME FRAMES

Gaps form on many different time frames of charts. Gap up stocks are considered noteworthy when they have a higher than average volume. Read our post on what does volume mean in stocks to understand the psychology behind it.

Daily charts are the easiest charts to find these window patterns on. Every day has the opportunity to create a gap. Gaps on weekly or monthly charts are much harder to find.

The stock would have to gap up between Friday and Monday on a weekly chart. Gap ups would have to occur at the end of a month and the start of the next month on a monthly chart. Hence the rarity of those gaps.

Any chart that has gaps almost every day should be avoided. These are thinly traded stocks and the gaps don't usually hold. Therefore they aren't considered as notable. It's normal market volatility and not excitement among traders.

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gap up patterns

TECHNICAL ANALYSIS 

There's a saying that all gaps must be filled. When gap up patterns happen the candlesticks tend to move away from moving average lines such as the simple moving average formula.

Stocks use these moving averages as equilibrium. They will usually return to equilibrium at some point. Moving averages can be used to find support and resistance along with candlesticks.

You may have heard that candlesticks are the first line of defense in technical analysis basics. It's true because of the key levels of support and resistance they map out.

Every trader is aware of these levels which means you should be too. Trading the gap and go strategy can be a rewarding move but always be aware of the technicals.

PATTERNS WITHIN PATTERNS

Groups of stocks form patterns. Each candlestick such as bearish candlesticks, bullish candlesticks and doji candlesticks tell a story while forming patterns. Since they form patterns to paint a bigger picture, it's imperative you know how to spot them.

Traders are creatures of habit. Hence they find patterns and trade them. Patterns may not tell you when a gap is going to occur. However, there is insight.

For example, an inverse head and shoulders coupled with a company you know will have good earnings could give you a hint. Let's take a look at an example.

gap up patterns

AMZN had an inverse head and shoulders form right before earnings. An inverse head and shoulders is a bullish reversal pattern. Their earnings were excellent causing a lot of excitement. As a result, the day after earnings the stock gapped up quite a bit.

TRADING GAP UP PATTERNS

Gaps occur with excitement. However, it can be dangerous playing earnings because even good news doesn't mean the stock will gap up. As a result, it's important to know technical analysis coupled with patterns.

Always be aware of the risks you can incur when playing earnings. If you hit, you can hit it big. As a matter of fact, as you saw in the chart above, the gap up pattern strategy with $AMZN would have paid off big time. Never risk more than you're willing to lose and always have a trading plan! Take our free online trading courses and stay up on your skills.

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