Posted May 19, 2021
By Alan Knuckman
Trading the Gap: a Crash Course
Gaps can be maddening.
What can you do when a market opens up significantly higher or lower than where it closed? This riddle haunts traders, but there is a solution that could help you succeed.
The interconnectedness of global markets puts money in motion night and day, and overnight moves are now extremely common. It has become a rare occurrence for the stock market to be unchanged when the bell rings.
Patience is an investor's greatest asset, especially when opportunities come and go, fast and frequently, and another day is just hours away.
Gap openings can disrupt both leverage and risk for traders that get caught in the emotion of the first few minutes of the trading session.
So what should you do with the market gap open?
- Wait one hour. Monitor the market in that amateur hour with your hands down and away from the computer mouse and mobile device. Let the fear and greed play out amongst the market chasers who are more worried about missing out than making sound and logical decisions.
- After that hour is up, analyze the market action.If new higher highs or lower lows are made after the open, the move could extend itself. Be cautious as the trend is already extended. Use the average trading range as a guide to measure more momentum potential.
- Look for the price gap to be filled. With a large opening hour, moving the risk reward may favor a price reversal to close that gap. The average trading range can give guidance that a market may have moved too far, too fast.
The worst-case scenario is to do nothing. If the risk reward is not favorable, then it may not be worth it to participate.
How much more upside is there to stocks opening 2% higher?
It costs nothing to sit tight!
Keep it In the Money,
Trading Tip of The Day: Sell or Let it Ride?
As long as a stock is acting right, and the market is right, do not be in a hurry to take profits.
- Jesse Livermore
Well before most speculators discussed the market in terms of trends, legendary trader Livermore possessed a deep understanding of the madness of stock market participants. He knew the trend was his friend and he was more than content to ride it until it stalled out.
These days, it feels as if traders' timeframes are getting shorter and shorter. Instead of letting a trade run its course, speculators are taking profits in a matter of hours, or even minutes. Sure, they might make some spare change here and there. But the real money is made by grabbing onto a big trend and not letting go until the market shakes you off.
If you're confident in your process, don't be afraid to let your winners ride!
— Greg Guenthner