Gap Reversals
These methods work best for a two or more day trade, known as a position trade. This method seems to
work best on NASDAQ stocks. In trending markets, it has an excellent accuracy rate of more than 80%.
Bullish Gap Reversal Guidelines or Requirements
- A stock that has a consistent trading range of at lease 1.75 points.
- Stocks that have a decent spread. Although a stock is often entered with an ECN, a trader does not
want to be severely hurt by the spread. Stocks should also have an adequate number of market makers
to allow for cushion.
- The stock should be down at least two days in a row before it becomes a consideration.
- Open of the current day MUST be in the top 25% of the day's price range.
- Close of the current day MUST be in the bottom 25% of the day's price range.
Next trading day's ACTION
- If the stock gaps open to the downside and then begins to rally back, buy it at 1/8 to 1/4 above the
previous day's low. If a trader misses that entry, buy when it trades above its first one-half hour high.
Market makers should be buying the stock as well.
- Stop/loss should be 1/8 to 1/4 below the current day's low.
- Look closely at the chart to determine an average and reasonable profit amount, or decide on a dollar
amount that is reasonable for the stock and get out at that point. If the market and/or sector remain
strong, a trader is in very positive territory and should hold it for the next day or two.
Bearish Gap Reversal Guideline Requirements
- A stock that has a consistent trading range of at lease 1.75 points.
- Stocks that have a decent spread. Although a stock is often entered with an ECN, a trader does not
want to be severely hurt by the spread. Stocks should also have an adequate number of market makers
to allow for cushion.
- The stock should be up at least two days in a row before it becomes a consideration.
- Open of the current day MUST be in the low 25% of the day's price range.
- Close of the current day MUST be in the top 25% of the day's price range.
Next trading day's ACTION
- If the stock gaps open to the upside and then begins to fall back, sell it short at 1/8 to 1/4 below the
previous day's high. If a trader misses that entry, sell it short when it trades below its first one-half
hour low. Market makers should be selling the stock as well.
- Stop/loss should be 1/8 to 1/4 above the current day's high.
- Look closely at the chart to determine an average and reasonable profit amount, or decide on a dollar
amount that is reasonable for the stock and get out at that point. If the market and/or sector remain
weak, a trader is in very positive territory and should hold it for the next day or two.
...Trading gaps Part 4
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