If you day trade stocks, you probably heard the term “fill the gap.” Traders are interested in filling the gap because when a stock gaps in price, it will usually head in the direction of filling the previous day’s close price and today’s open price. There are many ways to take advantage of this move, and in this article, we will discuss how to identify gaps and some gap-fill trading strategies.
When day trading, one important strategy is to look for gapping stocks. A stock gap occurs when the current day’s price action moves away from the previous closing price. This action creates a void in price. This void can happen for several reasons, but usually, it happens because there has been some news event that has caused investors to buy or sell the stock.
One approach to trading gapped stocks is to look for a stock to fill the void in price, known as “filling the gap.” Gap filling is when a stock’s price heads in the direction of the difference between the previous day’s close price and the current open price.
Identifying A Price Gap
One way to trade gaps is to identify stocks gapping up is look for stocks with heavy trading volume. High volume usually indicates some buying pressure behind the move and that the stock is likely to continue moving higher. If there is some big news coming out about a company, it may gap up or down when the market opens. You also want to look for stocks that are in a strong trend. If a stock is in a long-term uptrend, it is more likely to gap up than down. Lastly, you want to look for stocks with a history of gapping. This can be done by looking at a stock’s price chart for any sharp movements up or down.
Many stock screeners allow traders to search for stocks that have gapped 1%, 2%, or even more in price from the previous day’s session. Use these results to compile a watch list of potential stocks to consider for trading that day. Depending on how much risk you want to take, you could consider trading stocks with a more significant gap to fill, as it would confirm volatility in the market. Go with an even higher gap percentage, as fear and greed will likely drive the stock price in either direction.
Once you have found a few stocks that you think may gap, you must watch them closely. You want to wait for the stock to open and see which way it gaps. If it gaps up, you want to buy as soon as possible. If it gaps down, you want to short sell.
It is also important to mention that not all gaps will be filled. Sometimes a stock will gap up or down and never come back to fill the gap. This is why it’s essential to use other technical indicators besides just looking at price action.
Gap Trading Strategies
There are a few different approaches to trade price gaps. Here are just a few to consider:
1. Trade in the direction of the Gap: You will need to wait for the stock to open and trade toward the gap’s direction all day. This method is also known as a gap continuation. This continuation means buying when the stock continues to gap up after opening up, or selling when the stock continues to gap down after opening down. This strategy can be profitable if the stock continues to move toward the gap. If it decides to go the other direction, then this could cause losses. To avoid this, wait for the stock to develop a trend first to confirm movement in the same direction as the gap. The key here is to day trade cautiously, as these continuation gaps can be false moves.
2. Wait for the Gap to Fill: Another strategy is to day trade the stock when it gaps up and then fill the gap. This can be done by day trading the stock when it gaps up, has filled the gap going down, and is on track to continue downward. This method can be riskier, as the stock could find support or resistance at the previous day’s close price and may decide to revert in the opposite direction.
3. Trade the gap breakout: The strategy involves trading the gap itself. This means gapped-down stock to buy when the stock’s price breaks the high of the day and heads to fill the void. Once it reaches the previous day’s close price, sell the stock. The key here is to ensure you have a good handle on the stock’s volatility, so you don’t get caught in a false move.
4. Trade the Pullback: This means buying when the stock breaks the previous day’s high and pulls back. The key here is to wait for a confirmation before entering your trade to ensure that the pullback is not an actual reversal.
Remember, when day trading stocks that have gapped up or down, it’s essential to use caution and wait for confirmations from technical analysis before entering any trades. These strategies can help you profit from the gap, but only if you can day trade with discipline and patience.
These are just a few different ways you can day trade stocks using gap fills. These strategies can be profitable if done correctly, but they also come with risks.
Summary: Day Trade Gap Fill
Gap-fill trading is a day trading strategy that aims to take advantage of the price action when a stock gaps in one direction or another. A stock gap leaves a temporary hole in the market where buyers and sellers have not yet met. This method can provide an opportunity for day traders who are quick to act and willing to take on some risk.
Gap trading can be a risky trade if you do not have a tested plan that you use to trade and manage your position. Would you like to learn a step-by-step day trading system that allows you to take money from the stock market daily?
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