How to Trade Opening Gaps
How to Trade Opening Gaps
1. Examine the stock’s performance before the Gap
* Was the stock in an uptrend
* Was the stock in a downtrend
2. Examine the region the stock is now gapping into
* Into clear space
* Into an area of support (for a gap down)
* Into an area of resistance (for a gap up)
3. Look at the potential implications of the gap
* If the stock was in a downtrend and gapped up, would those traders now want to bail
* Similarly, if the stock was in an uptrend and then gapped down, how will those traders react
4. Examine the strength of the first candle
A. Is the volume on the first candle strong
B. Is the candle definitive (not a doji)
5. Set your buy order
* If you’re bullish, set your buy at 1 penny above the high of the first candle
* If you’re bearish, set your buy at 1 penny below the low of the first candle
* Consider a stop approximately at the midpoint of the first candle
6. Define your Risk / Reward
* Put your trade plan into action
Click Here to watch a video by the Shadow Trader on how to trade gaps
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