About Gaps in Stock Charts
Many Retail Traders really enjoy trading gaps because of the higher point gains that come quickly. But in order to reap the gains from a gap you must be in the stock PRIOR to the gap.
Chasing a gapping stock or trying to buy a stock that has gapped and is running, is a much higher risk.
The reason is because often the giant Buy Side Institutions have already bought the stock weeks ago. They are aware of the coming news and are planning on selling as the news reaches you, the Retail Trader.
Your goal is to always be in a stock before a gap occurs, rather than trying to rush and chase it. By getting in early, you will be trading with the giant Buy Side Institutions rather than against them.
Stocks that will gap are Small Cap stocks. They have fewer outstanding shares than most big blue chips, and the big popular stocks. The fewer outstanding shares a stock has then the more likely it will gap especially on news, since there is a limited number of shares available to trade.
Common Gaps are caused by overnight order flow of Market Orders and Limit Orders. Both types of orders should NOT be used because they expose the Retail Trader to the risk of a Common Gap as well as the risk of a poor fill.
Limit Orders can get the Retail Trader into a stock that is moving down or against the direction they want the stock to move, which is a bad idea.
The chart example below shows Common Gaps in candlestick patterns.
Martha Stokes CMT
TechniTrader technical analysis using a FreeStockCharts chart, courtesy of Worden Bros. and FreeStockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses
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