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TRADING GAPS
EVERYTHING
This report is a summary for the gap trading strategy outlined in the accompanying
video based gap trading course.
All trading and investing comes with a high level of risk and you can lose money if
risk is not managed properly.
These techniques should only be applied by experienced traders.
What is a gap?
The difference between the closing price and the following days opening
price of any market, stock, or other trading instrument.
Gaps are mainly caused by an earnings release, news items specific to
the company or industry, and any other reason you can think of, but
were not concerned with the reason why, only the trade and if we can
find a good support or resistance level that will provide a profit
opportunity.
What you have done is developed a step by step process that produces
predictable and repeatable results.
Theres no doubt you will see the similarities with Gap Trading.
If you can follow a system with a daily process for finding stocks that fit
the gap trading criteria, then applying rules to narrow the field to the
highest probability winning trades, then you can turn a system into a
profitable business.
Thats why Gap Trading works!
Were focused on morning gaps and gap fill. Were focused on trades
where we can scalp profits at a predictable and high probability, and
trades where we can hold for maximum profit by reducing our risk to
zero. (Yes, this exists while youre in a trade)
Gap window
When a stock opens higher or lower from the previous days close, that
price level becomes support or resistance. This will often become an
excellent trading opportunity when the rules are applied.
Gap fill
When a stock fills the open space left by the price jump or decline on the
day it gaped up or down.
Chart setup
Japanese candlestick charts work the best for this process. We have
the body of the candle where well find the open and close for the day
and the wick which shows any price extension of the high or low for the
day.
The time duration of the charts we use is very important. At times
were going to utilize five different time frames. The 10 minute, hourly
or 60 minute, daily, weekly and even monthly charts will all be used to
determine if a trade setup has the probabilities in our favor. The longer
time frames are used to find the best morning gap trades where we can
The Lazy Gap Trader
find the price level where the institutional traders are likely to either
purchase or sell a stock with size.
Tool Box
There are many useful tools that play an important role in analyzing
markets. Each analyst uses technical strategies that are important and
relevant for their work. For gap trading, we need just a few simple
ones. Youll use trend lines to draw a visual of where price needs to go
for you to get interested. A Fibonacci retracement tool, in some cases
will help to find or support the case for price objective. In the videos,
you saw how finding prior support and resistance or pivot points
enhances the probabilities your price level will work.
The concept is to keep it simple, follow the process and use only whats
needed. The more tools and analysis you do, the more uncertainty you
will create. Uncertainty will bring out your emotions and undoubtedly
limit your success.
Money Management
In any trading activity its important to adhere to strict capital
preservation and risk management measures.
There are two primary components to managing your capital
while trading gaps.
1. Establish stop loss and profit targets for each trade. While its
not an exact science, there are rules of thumb that work well.
Using between and 1% of the current market price of the
stock has been a good guide as long as youre able to use some
discretion and avoid the greed factor. The lower the price of the
stock, the less of a reaction or bounce will occur off an
important level. Conversely, the more volatile a stock is the
wider range you can expect it to trade. These are the ones that
may require a little more rope on the downside if you can
tolerate the wait, but the higher volatility stocks will give you
more profit when they get going. For example if GE is trading
at $27 per share and gaps down 5% at the open which
represents a $1.35 move, we may only be looking for about a
$0.25 profit objective. However, if AAPL is in play, the
objective may be larger. In the Gap Trading course, you will
learn specifically how to determine what profit objective is
appropriate for each stock you trade. Maintaining a stop is
extremely important because a stock making large moves at the
open can travel farther than most people realize which can
result in a quick loss of capital. Sometimes, youre first loss is
your best loss. You must realize, we do not and cannot win on
every trade, but if youre win percentage is high enough, and
you have discipline in your money management, then youll be
a winner.
The Lazy Gap Trader
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