profitable price gap trading

Success Tips for Stock Trading Price Gap Profits

There are many stock trading tips but one of the most effective is price gap trading.

The ability to read price action allows you to see what is happening in real time in the market and then take the necessary steps to profit from it. And, one of the most common price patterns you’ll spot early on is the price gap.

Knowing how to spot and trade price gaps can help you profit from one of the most common price patterns across a wide selection of markets.

So…

What are price gaps?

First, price gaps are common across all types of markets. A price gap is when a price bar closes and the following price bar opens outside its trading range. This happens because a surge in trading volume enters the market at that moment. It could also reveal a resumption of the current trend, a counter-trend move or a halt to the current trend.

Why are price gaps important?

Like boxing, timing is everything with price gaps. They can cause a stock to advance or deliver a knockout blow to the current trend.

By understanding their impact you can exploit these moves to enter, exit, or scale in/out of your position.

How do price gaps help with trend trading?

Price gaps can help in one of two ways.

One, they help you identify the strength of a trend. This helps you determine whether it’s worth entering a position.

If several price gaps are moving in the direction of a price trend, then it shows the trend has strength. This trend strength pushes the trend forward in its current direction.

For example, if a stock is trading upward and you notice a steady series of bullish price gaps that have formed along the way then that is a strong indicator of upward strength. It’s also a strong indicator that the trend will continue since traders are buying large enough blocks of shares that cause the price gaps to develop. This creates a chain reaction which will keep the trend in place.

Second, price gaps can act as buying or selling signals at the right price point.

Breakout traders know that if a stock is in a tight trading range that a price gap can act as a buy or sell signal.

For example, in the Forex market, if a currency pair experienced a strong decline before forming a Bearish Flag Pattern then a downward price gap could indicate a resumption of that decline. Once a price gap forms outside the Flag’s trading range, punching through support, then the price gap could act as a signal to go short right at the beginning of a new bearish move.

Spotting Reversals

In track and field, marathon runners and sprinters compete at two different levels but they share one common trait – if they keep running without stopping they will collapse.

It’s the same with trends.

When trends move, they either move fast like a sprinter or over a long steady pace like a marathon runner. But, at some point, they will run out of steam and collapse.

Price gaps can mark the end of trend by revealing the last gasp of effort to continue forward.

Price gaps will help you spot when the party is over and the trend is likely to stop and/or reverse.

Look for price gaps forming at new highs or lows on massive amounts of volume. This acts as an indicator to exit your position or tighten up your stop loss points. A price gap on huge volume reveals a last ditch effort of whoever controls the trend at that time. But, now, the trend has run its course and they have run out of steam.

These are “exhaustive price gaps”.

With nowhere to go, price will either trade flat at that price level or reverse.

Another price gap in the opposite direction following an exhaustive price gap is a strong sign of a counter-trend price reversal. This indicates that traders are taking new positions in the opposite direction.

Summing It Up

Price gaps are common to price action but are uncommonly understood in their application.

Understanding their importance at critical price levels leaves you prepared to act as needed.

Use price gaps to time your entries or signal an exit so be sure to include them in your trade analysis to improve your performance.

Billy Williams
 

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