Stocks gapping in pre-market offer some of the best opportunities for day trading and swing trading. No matter what type of trader or investor you are, you need to understand stock gaps.

Today we will give you an introduction to stock gaps, and the different ways stocks will behave.

Let’s start by defining what a stock gap is:

What is a Stock Gap?

A stock gap is simply a change in a stock’s price from its prior close. In pre-market and after-hours trading, stocks can rise and fall in price.

Sometimes press releases can cause large gaps in either direction, as a larger number of buyers and sellers enter the market.

It is called a “gap-up” when a stock trades higher than it’s prior closing price. For example, If Amazon $AMZN closes at $3200 and then opens the next day at $3300, that is a gap up.

It is called a “gap-down” when the opposite happens. If $AMZN closes at $3400 and opens at $3100, that is a gap down.

Now let’s get into the different types of patterns you will during a gap up or gap down:

Gap & Go

A gap & go is when a stock gapping up continues the upward momentum when the market opens. You see this kind of momentum when a stock gaps up over nearby by resistance levels, eliminating potential areas of supply to halt the stock’s uptrend. A stock gapping up to all-time highs is often the type of stock that

Gap & Crap

This is when a stock reverses strongly after the market opens after gapping up pre-market. Stock’s that do this will often fill their gap, and test nearby support levels from pre-market, and on the daily chart. A gap-and-crap will often occur when a stock has an especially large gap up, or gaps into resistance levels.

Gap Down Continuation

The opposite of a gap and go. This is where a stock continues its downward momentum from the pre-market. Typically stocks that gap down and continue lower gap below nearby support levels, eliminating potential areas of demand that would bring buyers back into the stock.

Gap Down Reversal

The opposite of a gap and crap. These reversals typically occur when a stock gaps down into areas of support, or it is strong uptrending stock.

Gap and Chop

Choppy stock gaps will typically occur after the merger and buy-out catalysts. We personally don’t recommend trading stocks with these type of catalysts. In general, we prefer to trade stock gaps that have liquid pre-market action, ideally forming a trend we can join at the market open.

Summary

Learn patterns to trade each type of stock gap (besides the chop!). If you want to see how we trade these types of gaps, register for our upcoming free chatroom day and watch veteran day trader Kunal Desai trade live on screen-share!

Join Free Chatroom Day

Join Free Chatroom Day

The post 6 Types of Stock Gaps: How to Day Trade the Market Open appeared first on Bulls on Wall Street.

It is characterized by a strong counter-trend move in the opposite direction a stock has been trending in for prior days/weeks. There are two types of exhaustion gaps: Bearish exhaustion gaps, and bullish gaps. Here are examples of both:

Bullish Exhaustion Gap Example

A bullish exhaustion gap occurs at the end of a strong downtrend in a stock.  Here is a bullish exhaustion gap example with Kroger stock:Notice how it has a huge red day right before the circled green candle. And then the stock gapped down, even more, the next day. At this point, all of the supply has dried up since the stock has dropped so much in a short period of time (in this case it was bad earnings) and it was due for a dead cat bounce. As soon the market opened the gap was bought up and the stock rallied strongly.

Bearish Example

A bearish exhaustion gap is the opposite of a bullish one. It is a stock that gaps up which is sold into strongly. Here is an example of a bearish gap in Nvidia stock:You can see how it had a strong run-up, and then a huge green day the day before it had that huge sell-off into the exhaustion gap. It gapped up even further after a big day, and there was a scramble for traders and investors to take profits soon after the market opened.

Anticipating Exhaustion Gaps

You are probably thinking: How do I know the difference between an exhaustion gap or a gap that is just a trend continuation? How you can identify a likely exhaustion gap candidate is a stock that starts to reverse trend soon after the market opens after a big gap up in a strong uptrend or a big gap down in a strong downtrend.

As seen in the examples above, the exhaustion gap is the trigger for a short term trend reversal. Being able to recognize exhaustion gaps will allow you to take a position in a stock in anticipation of the gap reversing. These reversals will often be strong, as you can see in both examples, and can be great day trading opportunities if executed correctly.

Trading Exhaustion Gaps

This is a SHORT TERM trading setup. This is a trade you want to be holding for several hours, or maybe a couple of days. This is not a setup that you want to marry forever. NVDA resumed trend later that year and starting a run to the high $200’s. To make these high probability setups, you need to have EXTENSION in the names of interest. They have to be in an overbought or oversold state to make the setup trustworthy. This means you would to see an RSI above 80 for a short, or below 20 during the morning of the gap up.

Get Early-Bird Pricing for Our Next 60-Day Live Trading Boot Camp

We don’t sugar coat it. Becoming a consistently profitable stock trader is easy, or an overnight process. That’s why our 60-day Live trading boot camp is designed specifically to help struggling traders overcome their weaknesses, and expedite their path towards profitability. We will teach you 30 more trading setups in this boot camp, in addition to the exhaustion gap.

Early-Bird pricing ends February 1st!

Click here to save your seat for our next live-trading bootcamp.

The post Exhaustion Gap Definition: One of the Most Powerful Reversal Setups appeared first on Bulls on Wall Street.

What is a Stock Gap?

What Causes Gaps?

Finding the Right Gappers To Trade

1. Large Intraday Range
2. News catalyst
3. No nearby resistance for a long play
4. No nearby support for short play
5. Low-Float
6. Former runner, meaning they have made big moves in the past
7. High relative volume

Free Trading Assessment

Get your free trading assessment here.

The post What Is A Stock Gap and How To Trade Them appeared first on Bulls on Wall Street.