Gap Trading 101: How To Trade The Gap

Penny stock trading is a high-risk high-reward situation in which successful traders can make 100-400% profits overnight. However because of the risk, it’s important for traders to use every “easy” trading technique they have at their disposal.

And no trading technique is easier than trading the gap.

Which is why in this article you will learn the basics of trading the gap & exactly how you can start using it today, to compliment your technical analysis.

What is trading the gap?

Trading the gap is a stock trading technique that involves profiting from the first 5-30 minutes of a trading day. The gap itself is the price difference between the price that a stock previously closed at & the price the stock currently opens at.

Stocks rarely if ever open at the same price that they closed the previous day, and this leads to high stock volatility for the first 5-30 minutes of trading. High stock volatility equals higher risk & higher rewards.

This volatility exists because traders who were unable to buy or sell before the previous close are anxious to buy or sell as soon as soon as the market open. This emotion fueled trading can create instant bullish or bearish price movements called the “gap” that skip prices in between.

An example would be a close of $2.00 a share & a open of $2.25 a share. The Gap is the .25 per share increase.

How to trade the gap?

Trading the gap can be extremely profitable, in fact it’s possible to make large profits simply from only trading the gap (the first 5-30 minutes) of trading & leaving the stock market alone for the rest of the day.

To trade the gap you simply need to understand 2 things.

1.The most likely overall direction of the stock in the short-term. (bullish or bearish)

2.The psychology of the traders that create the gap in the first place.

If you know that the overall direction of the stock in the short-term is much more likely to be bullish & the stock opens down on selling (called profit taking if the previous day was bullish) then the right way to trade the gap would be to buy on the downward gap.

This is because the in this scenario the stock only opened down because traders who weren’t able to take profits the previous day before close, are taking profits at the open of the current day.

However, after these traders are done taking profits the stock is expected to go back up because the stock is expected to be bullish for the short term.

Do gaps fill themselves?

One important thing to remember is that “gaps” have a tendency to fill themselves.

This means that if a stock closes at $2.00 a share and opens up at $2.40 a share there is a good chance that sometime during the trading day the stock will fall back to $2.00 a share & “test” support before going much higher or lower.

This is mostly because of profit taking by traders who were on the correct side of the trade & are holding a profit of the difference between the previous close price, and current open price.

It’s important to keep this phenomenon in mind when you’re using the gap trading technique.

Closing Words

Trading the Gap or Gap Trading is a very profitable way to make money trading penny stocks. By understanding the likely overall short-term price direction of a stock and the psychology that goes into how trading gaps are created it’s possible to successful trade the gap over and over again.

By mastering this technique it’s possible to make money from penny stock trading from the first few minutes of the day.

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