Significant Gaps. Is volume greater than average? Where is it gapping to? What are the indices doing? Is the gap clearing supply/demand?

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Johnathan Cummings
6 years ago
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insignificant gaps Significant gaps are unique Reflect shock value Sudden imbalance of price Leads to emotional and irrational action Change the landscape of

1 Mastery Series This Lesson: Significant vs. Insignificant gaps Rating significant gaps Finding significant gaps Gap impacts on indicators Trade Setups with Gaps Significant vs. insignificant gaps Significant gaps are unique Reflect shock value Sudden imbalance of price Leads to emotional and irrational action Change the landscape of the patterns Reflect stocks that are in play Questions to consider Where is the stock gapping from? Is volume greater than average? Where is it gapping to? What are the indices doing? Is the gap clearing supply/demand? Is there a void ahead? Are traders trapped in the recent short term? PAGE 1

Two types of significant gaps: Professional Gaps Amateur Gaps Professional Gaps Has a greater probability of continuing in the direction of the gap.

2 Two types of significant gaps: Professional Gaps Amateur Gaps Professional Gaps Has a greater probability of continuing in the direction of the gap. Applies to day of gap and short/intermediate move immediately following gap. Provides a very high probability trade setup for both day trading and swing trading. Amateur Gap Has greater probability of moving in the opposite direction of the gap. You do not need a bunch of fancy names for gaps. A gap is either professional or amateur. Keep it simple. Applies to day of gap and short/intermediate move immediately following gap. Provides a very high probability trade setup for both day trading and swing trading. How To Rate Significant gaps leave clues: Point 1 - Location Point 2 - Short term pattern Point 3 - Long term pattern Point 4 - Relative strength/weakness Point 5 - Volume Point 6 - Void PAGE 2

3 Point 1 - Location Gaps just above an area of old supply/new demand (pivot point) on daily chart Should be less than 8-10% from pivot point Check multiple time frames Identify relevant supply/demand areas PAGE 3

upper or lower shadows Higher than normal volume (trap) [OR] Last 5 days

4 Point 2 - Short Term PatternA Bollinger squeeze Did the following short term setup occur: Yesterday was a wide range bar (WRB) There are no long upper or lower shadows Higher than normal volume (trap) [OR] Last 5 days were in a base/consolidation Consult Multiple time frames for guidance PAGE 4

(not extended) or was in a consolidation or base and today s gap

5 Point 3 - Long Term Pattern [OR] The daily chart is in a trend but today s gap reversed or ended the trend Daily chart is in uptrend (not extended) or was in a consolidation or base and today s gap opens over the base Gap is over a daily sell setup on daily chart PAGE 5

gapping up (relative weakness) Stock is gapping up or down while market is

6 Point 4 - Relative Strength/Weakness Stock is gapping up while market is gapping down (relative strength) Stock is gapping down while market is gapping up (relative weakness) Stock is gapping up or down while market is opening flat Market is gapping down while stock is gapping up (or the reverse) PAGE 6

7 Point 5 - Volume Want decent pre-market volume (50,000+) Want stocks that have average daily volume of 1 million+ Focus on above average volume PAGE 7

better The profit opportunity is the area from old supply,

8 Point 6 - Void Minimum of 3:1 reward/risk to next area of supply or demand on chart (void) The bigger the void the better The profit opportunity is the area from old supply, now new demand, to the next area of supply (the void) PAGE 8

9 A professional gap can not be: An American Depository Receipt An issue that trades 24 hour markets (gld/slv) Gapping due to a buyout A stock with a daily chart that is a mess (lots of choppiness, long shadows etc) PAGE 9

10 Key Factors To Consider Is there a reasonable spread between the bid and the ask? Don t ask why - it s not important. The why of the gap has already been factored in Gaps remove the need to clutter charts with indicators Price is only leading factor By the time a lagging indicator catches the price on a significant gap, the move has already happened Focus on price and Supply/Demand You need pre-market data for day trading gaps PAGE 10

How To Find Significant gaps Free Resources www.nasdaq.com www.finviz.com www.thestockmarketwatch.

11 How To Find Significant gaps Free Resources Your Trading software: TradeStation Think or Swim Interactive Brokers etc PAGE 11

12 Simple Setup to trade gaps Trading Intra-day Gaps Identify & mark the demand/supply areas prior to gap day Identify & market pre-market demand/supply areas Rate the gap using the 5 simple steps Look for the wide range bars with increased volume Make sure the stock fits your trading plan: Stock price & bid/ask spread Sufficient 3:1 reward to risk Pre-plan your trade ideas before the market opens Pull Back Trade Setup Quality trade setup - Buy or supply or demand Focus on top 2-3 best gaps you identified pre-market Watch for wide range bars to form Look for a 2-3 bar clean (small wicks) pullback into 40% of wide Trade at or near reversal times from a 5 or 15 minute charts Confirm target to next supply area is greater than 3:1 Hunt for a reversal candle - such as an engulfing or doji Buy above reversal candle and place stop below reversal candle PAGE 12

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With that, let s dive into the steps. Step 1 Identify range bound markets on Daily or 4 Hour Charts

With that, let s dive into the steps. Step 1 Identify range bound markets on Daily or 4 Hour Charts If you have been trading for any length of time, you have probably noticed that the markets are moving sideways A LOT. Consolidation is a huge part of the market s balance and so it makes sense to learn