Trading Stocks Education - Trading tactics & examples

Gap Reversals

These methods work best for a two or more day trade, known as a position trade. This method seems to work best on NASDAQ stocks. In trending markets, it has an excellent accuracy rate of more than 80%.



Bullish Gap Reversal Guidelines or Requirements

1. A stock that has a consistent trading range of at lease 1.75 points.
2. Stocks that have a decent spread. Although a stock is often entered with an ECN, a trader does not want to be severely hurt by the spread. Stocks should also have an adequate number of market makers to allow for cushion.
3. The stock should be down at least two days in a row before it becomes a consideration.
4. Open of the current day MUST be in the top 25% of the day's price range.
5. Close of the current day MUST be in the bottom 25% of the day's price range.

Next trading day's ACTION

1. If the stock gaps open to the downside and then begins to rally back, buy it at 1/8 to 1/4 above the previous day's low. If a trader misses that entry, buy when it trades above its first one-half hour high. Market makers should be buying the stock as well.
2. Stop/loss should be 1/8 to 1/4 below the current day's low.
3. Look closely at the chart to determine an average and reasonable profit amount, or decide on a dollar amount that is reasonable for the stock and get out at that point. If the market and/or sector remain strong, a trader is in very positive territory and should hold it for the next day or two.

Bearish Gap Reversal Guideline Requirements

1. A stock that has a consistent trading range of at lease 1.75 points.
2. Stocks that have a decent spread. Although a stock is often entered with an ECN, a trader does not want to be severely hurt by the spread. Stocks should also have an adequate number of market makers to allow for cushion.
3. The stock should be up at least two days in a row before it becomes a consideration.
4. Open of the current day MUST be in the low 25% of the day's price range.
5. Close of the current day MUST be in the top 25% of the day's price range.

Next trading day's ACTION

1. If the stock gaps open to the upside and then begins to fall back, sell it short at 1/8 to 1/4 below the previous day's high. If a trader misses that entry, sell it short when it trades below its first one-half hour low. Market makers should be selling the stock as well.
2. Stop/loss should be 1/8 to 1/4 above the current day's high.
3. Look closely at the chart to determine an average and reasonable profit amount, or decide on a dollar amount that is reasonable for the stock and get out at that point. If the market and/or sector remain weak, a trader is in very positive territory and should hold it for the next day or two.

Trading gaps Part 2         Trading gaps Part 4