Mastering Gap Trading: Unlocking the Secrets to Profit
This week, when Oracle reported earnings and significantly gapped up, some of my trading subscribers were ruing that it was a lost opportunity and lost the chance of making money. Other subscribers knew there must be a way to make money even if the stock gapped up and were not sure how they could implement a gap trading strategy to maximize their profits.
What is a Gap?
In the trading world, we say a stock gapped up if the Open price of the stock is greater than the previous close price of the stock creating a gap in the chart. Similarly, we say a stock is gapped down if the Open price of the stock is less than the previous close price of the stock creating a gap in the chart.
What is a gap fill?
Whenever there is a gap in the chart to either upside or downside, the stock price has more probability to retrace filling the gap created. But, it is not a given and may not happen immediately. Usually gap ups and gap downs happen because of some news ( mostly earnings, drug trials, conferences etc) and the stock would have momentum in the same direction it gapped. It might take a while for the stock to retrace. When a gap fill happens, the closing price of the stock will be less than the close price of the stock from where it gapped.
