YOU NEED TO KNOW
TRADING GAPS
THE LAZY GAP TRADER
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 we’re 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.
Types of Gaps Trades Covered in the Course There are two very specific and actionable types of Gap Trades the course focuses on. Morning Gaps Stocks that open much higher or lower from where they closed the prior day’s session are known as Morning Gaps. These provide an enormous opportunity for those traders that understand how to find and identify the price level where these stocks should find at least a short term support or resistance price where a trade can be taken from an expected reaction. In the course, you’ll learn how to identify these price levels,
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recognize how much of a reactionary bounce they should have, how much risk to take and how much profit to look for. There are specific price levels where the Institutional traders are very likely to support or distribute a stock. These price levels can be found and calculated using simple mathematics. You will learn precisely how to calculate these price points. In addition, you’ll also learn how to identify the highest probability set ups and how to avoid the ones that have a limited chance of success. Can you imagine catching a low on a stock similar to the one depicted below? An example of a morning gap trade looks like this:
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Gap Fill Trades The second strategy taught in the course is taking advantage of stocks that come back to fill their gaps. Not all gaps are created equal, therefore, it’s extremely important to understand which stocks work the best, how they arrive at their gaps and what type of reaction you should expect from the Gap Fill. All these items are discussed and taught throughout the course. It’s equally important to understand which stocks work the best with these strategies, and which ones to avoid. If you understand the characteristics of how a stock should fill its gap, then you can begin to realize the profit potential these strategies afford those that wish to profit. An example of a stock filling its gap looks like this:
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Why does trading the gaps work? More often than not price will retrace to an opening on a chart known as a “gap.” This is also known as “filling the gap.” There is no hard and fast rule about filling gaps, although most gaps do get filled – at some point. We’re focused mainly on the gaps that get filled in a short period of time, although these strategies and techniques work no matter when the gap is filled. The numbers never lie. We know most gaps get filled. More importantly, we know by mountains of historical data what the typical price reaction of a stock or market is after it approaches “the gap.” Furthermore, using the same historical data, we know precisely what conditions on a chart will increase the probabilities to determine what price will do once it reaches that level. (in other words, we know what to look for that will increase our probabilities of making money) Let’s break this down and look at it a little differently. Imagine you have a business with a product that’s in constant demand. You have a great relationship with a supplier who gives you fantastic prices, and best of all, very few of your competitors know about it. The product and supplier are extremely predictable and consistent. No matter how much product you take on, the large majority of the time you’re able to immediately turn a profit, and the few times you don’t the losses are very small and manageable. For years you’ve been selling the same product line, from the same supplier to the same customers day after day, month after month, and so on, for years.
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What you have done is developed a step by step process that produces predictable and repeatable results. There’s 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. That’s why Gap Trading works!
Narrow the field Many of you have read technical analysis books, taken trading courses and still find yourself in a never ending search for simple answers to what seems like a complex question of how to make money in the markets. Of course there are countless methods of trading and investing. Many of them with merit, and more often than not it’s the trader or investor that makes the difference. This system is no different. You must apply the process, rules and discipline to find success with gap trading. We start with defining this version of gap trading. There are several text book definitions and methods to trade gaps. We’re going to discard a large majority of those scriptures and focus our efforts on a narrow segment of the market we know to be fruitful. (Let everyone else continue to bang their heads trying to follow less effective strategies) You may have heard terms like “breakaway gap, continuation gap, exhaustion gap and others. Block them out for now. The Lazy Gap Trader
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We’re focused on morning gaps and gap fill. We’re 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 you’re in a trade)
Some housekeeping and slang There are some general terms and concepts to learn that will become the foundation of our gap trading strategy.
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 we’ll 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 we’re 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
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find the price level where the institutional traders are likely to either purchase or sell a stock – with size.
The daily process In the course, you’ll learn exactly what you need to do each and every day to be successful. You’ll learn how to identify the right stocks, at the right price. You’ll learn what to look for in terms of how a stock is coming into or approaching an important level. You’ll learn how to manage risk properly. You’ll learn how to know and understand how much profit to be looking for on a trade, therefore you have an exit strategy before you even enter the trade. You’ll learn how to calculate how much risk is appropriate on each trade based on the size and price of the stock. 1. First we have to scout out a listing of stock that are gapping up or down at the open. This is a simple process with the volumes of free information available on the internet. Most brokers who provide a trading platform also have stock screeners and hot lists of “what’s moving” for the day. Within these lists are categories for stocks moving up or down in either dollar or percentage terms. Bingo, this is what we’re looking for. This information can also be found on sites like http://finviz.com and http://www.tradingview.com 2. Next we narrow down the list to only the stocks we’re interesting in trading. We immediately eliminate low priced stocks, no stocks under $10 per share, preferably $20. We will not trade stocks with average daily volume under 500 thousand shares. The higher the better.
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3. From the refined list, we now determine which stocks have an early morning scalping opportunity. This is done using a mathematical formula, previous support and resistance, pivot points and other information to determine where the stock might travel to in an extreme move up or down. We focus on these early in morning because they have the highest chance of immediate profit if our objective is reached. 4. Now put all the stocks on a specific watch list that will constantly be monitored and harvested for profit over the coming days and beyond. Each chart will have an alert and trend line identifying the buy or sell price level. Visuals work best. This becomes our living gap fill list.
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. You’ll 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 what’s 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.
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Money Management In any trading activity it’s 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 it’s not an exact science, there are rules of thumb that work well. Using between ½ and 1% of the current market price of the stock has been a good guide as long as you’re 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, you’re first loss is your best loss. You must realize, we do not and cannot win on every trade, but if you’re win percentage is high enough, and you have discipline in your money management, then you’ll be a winner. The Lazy Gap Trader
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2. You’ll learn how to maximize your profit on a trade while reducing your risk to zero. Let’s say you’re taking a trade based on Disney (DIS) filling a gap. You know your stop and your “initial” profit target. You enter the trade and buy DIS at $100.00 with an objective to scalp $.60 in a matter of seconds or minutes. (happens all the time) It’s working out and you find yourself ready to take the profit and move on. You bought 500 shares which puts $300 in your pocket on this single day trade. But wait, there’s more. What if you only sold half the position, putting $150 in your pocket and placed a stop loss at either break even (your purchase price) or slightly higher. This way, you have the opportunity to hold Disney for higher prices. If the stock climes higher throughout the day, you continue to move your stop higher. What happened here was you guaranteed yourself a profit on the trade, took the prospect of a losing trade off the table and positioned yourself for higher prices and more profit with no risk and no emotion involved. You’ve seen from the examples in the videos how this strategy works and puts you light years ahead of the average trader.
Hard and fast rules 1. Do not trade after hours or pre market unless you’re very experienced and fully understand the risks involved. Stocks trade much less volume outside of normal trading hours. Strange things can happen with limited liquidity. Caveat emptor. 2. If a stock gaps above or below a target entry price for a trade, take it off the table unless you have a secondary level of support or resistance.
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3. Don’t chase a stock up or down. As the price begins to get close to objective, place a limit order at your desired price and let it happen. Never use market orders. 4. Not all trades will work out the way you dream, it’s part of the business. This is a risk business and you must understand each and every time you enter a trade you don’t know exactly what will happen, you are making decisions based on what you believe to be the highest probabilities available. That never means 100%. 5. While waiting to enter a trade, if the stock comes close to your objective and trades away close to or more than the amount your profit objective would have been, but comes down later to your desired entry price – DO NOT take the trade, it already did what it was supposed to do and the probabilities of it happening twice is greatly reduced. 6. DO NOT make up your own rules. 7. Click Here for additional information about the Gap Trading Course.
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