You won't believe how much money there is in Gaps!
The difference between the closing price and the following days opening price of any market, stock, bond, etc…
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 don’t care about the reason, only the trade.
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 as it approaches “the gap.”
Furthermore, using the same historical data, we know precisely what conditions on a chart will increase the probabilities of 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 different.
Imagine your business with a product line 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.
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 highest probability winning trades, then you can turn a system into a profitable business.
That’s why Gap Trading works!