Gap Up Patterns

How to Trade the Gap Up Pattern

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, a high earnings report generates a lot of interest and thus volume (bullish buying at the ask). As a result, there’s a day when there’s a lot of demand for the stock, causing the printed price and the ask to rise.

The window patterns form as long as they stay above the previous day’s low. Gaps tell us something happened to the psychology of traders that resulted in that move.

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 next day’s opening price. The opening price of the next candle gaps up. Watch our video above to learn more about gaps.

Gaps occur when no trading is happening, normally after hours and premarketing. After-hours and premarket traders push the price up or down.

The world received Japanese candlestick patterns from rice trader Homma; his realization of emotion and price movement led him to develop the candlestick system.

Gap Up Bullish Pattern

Gap Up Pattern Basics

Be part of our team in our swing trade room; a great group of traders scan and analyze gap patterns daily. Scanners are a great tool for trading ideas to scan the premarket, 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 about his bullishness on the stock has just come out.

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

$NFLX posted very good earnings, causing the stock to gap the next day. But, again, traders were excited by the earnings report, causing the demand for 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 volume means 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 on a monthly chart at the end of a month and the start of the next month. 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.

Always be confident in your trading style and the pattern being traded. Having strong fundamental and technical analysis is very important in stock training. Check out our free stock trading courses to help along your trading journey.

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Technical Analysis

There is a saying that all gaps must be filled. When gap-up patterns happen, the candlesticks move away from average lines, such as the simple moving average.

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.

Candlesticks are the first line of defense in technical analysis basics. This is because of the key support and resistance levels they map out.

Every trader knows these levels; trading the gap and go strategy can be rewarding, but always be aware of the technicals.

Patterns Within Patterns

Each candlestick, such as bearish candlesticks, bullish candlesticks, and doji candlesticks, tells a story while forming patterns. Knowing how to spot them is important since they form patterns to paint a bigger picture.

Traders are creatures of habit; hence, they find patterns and trade them. Patterns may not tell when a gap will occur; however, there is insight.

For example, an inverse head and shoulders coupled with a company with good earnings could give a hint. Take a look at the example below.

Gap Up Example

Gap Up Pattern Example

$AMZN had an inverse head and shoulders form right before earnings; Their earnings were excellent. As a result, the stock gapped up a bit the day after earnings.

Trading Gap Up Patterns

Gaps can occur with excitement, news, and reports. However, it can be dangerous to play earnings because even good news does not mean the stock will go up. As a result, it is important to know technical analysis coupled with patterns.

Always be aware of the risks incurred when playing earnings—there are many risks. For example, the chart above shows that the gap-up pattern strategy with $AMZN would have paid off big time. 

Never risk more than you’re willing to lose, always have a trading plan, and always be sure to wait for confirmation.

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