The 4 Types of Gaps

The 4 Types of Gaps

When it comes to trading, there are literally countless signals, indicators, chart patterns and candlestick patterns that traders can use. Often times, it becomes a buffet of confusion: too many choices and an overwhelming amount of information.

In my opinion, one of the easiest ways to cut down on as much clutter as possible is to attack with the 'less is more approach”. In order for me to take a swing trade or day trade, there needs to be a gap in the price action. This will automatically and drastically reduce the number of stocks to filter through while trying to find a trade.

Gaps create emotion. They scare the majority of investors in a particular company. Usually the 'why is this stock gapping” question eludes the average investor. Could be earnings, news, or a myriad of other reasons, but the gap is unexpected; therefore, it's scary and concerning.

I've done the best I can to narrow down the types of gaps to four specific gaps. The names of these gaps are just something I came up with. Honestly, you can call a gap by any name. The name or title is irrelevant; it's the meaning behind the gap that's crucial. In this short list, hopefully you will also learn the meanings behind the gap and how they can be traded.

The bullish retest gap: When the prior day's candle is white/bullish. The stock gaps up. Wait for the retest / pull back. This is because people who bought the prior day will likely sell to lock in profits.The bearish retest gap: When the prior day's candle is black/bearish. The stock gaps down. Wait for the retest / pull back. This is because people who sold to open the prior day will likely buy to close, locking in profits.The bullish gap and go: When the prior day's candle is black/bearish and the stock gaps up, this traps anyone who went bearish the prior day. Be more aggressive with this entry. Look for a buy set up on the 15 min, hourly or daily chart.The bearish gap and go: When the prior day's candle is white/bullish and the stock gaps down, this traps anyone who went bullish the prior day. Be more aggressive with this entry. Look for a shorting set up on the 15 min, hourly or daily chart.

If you are interested in a free Youtube video that covers this with more of a visual appeal, check out this video. 

Until next time - remember, Love life, live life and trade it! 

Jerremy Alexander Newsome