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PAGE 1
Mastery Series Significant Gaps
Significant Gaps
This Lesson:• Significant vs. Insignificant gaps
• Rating significant gaps
• Finding significant gaps
• Gap impacts on indicators
• Trade Setups with Gaps
Significant vs. insignificant gapsSignificant gaps are unique
• Reflect shock value
• Sudden imbalance of price
• Leads to emotional and irrational action
• Change the landscape of the patterns
• Reflect stocks that are in play
Questions to consider
• Where is the stock gapping from?
• Where is it gapping to?
• Is the gap clearing supply/demand?
• Are traders “trapped” in the recent short term?
• Is volume greater than average?
• What are the indices doing?
• Is there a void ahead?
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Mastery Series Significant Gaps
Two types of significant gaps:
• Professional Gaps
• Amateur Gaps
Professional Gaps
• Has a greater probability of continuing in the direction of the gap.
• Applies to day of gap and short/intermediate move immediately following gap.
• Provides a very high probability trade setup for both daytrading and swing trading.
Amateur Gap
• Has greater probability of moving in the opposite directionof the gap.
• Applies to day of gap and short/intermediate move immediately following gap.
• Provides a very high probability trade setup for both day trading and swing trading.
How To Rate Significant GapsSignificant gaps leave clues:
• Point 1 - Location
• Point 2 - Short term pattern
• Point 3 - Long term pattern
• Point 4 - Relative strength/weakness
• Point 5 - Volume
• Point 6 - Void
You do not need a bunch of fancy names for gaps. A gap is either professional or
amateur. Keep it simple.
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Mastery Series Significant Gaps
Point 1 - Location
• Gaps just above an area of old supply/new demand (pivot point) on daily chart
• Should be less than 8-10% from pivot point
• Check multiple time frames
• Identify relevant supply/demand areas
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Mastery Series Significant Gaps
Point 2 - Short Term PatternA Bollinger squeeze
• Did the following short term setup occur:
✓Yesterday was a wide range bar (WRB)
✓There are no long upper or lower shadows
✓Higher than normal volume (trap)
[OR]
✓Last 5 days were in a base/consolidation
• Consult Multiple time frames for guidance
PAGE 5
Mastery Series Significant Gaps
Point 3 - Long Term Pattern
• The daily chart is in a trend but today’s gap reversed or ended the trend
• Daily chart is in uptrend (not extended) or was in a consolidation or base and today’s gap opens over the base
[OR]
• Gap is over a daily sell setup on daily chart
PAGE 6
Mastery Series Significant Gaps
Point 4 - Relative Strength/Weakness
• Stock is gapping up while market is gapping down (relative strength)
• Stock is gapping down while market is gapping up (relative weakness)
• Stock is gapping up or down while market is opening flat
• Market is gapping down while stock is gapping up (or the reverse)
PAGE 7
Mastery Series Significant Gaps
Point 5 - Volume
• Want decent pre-market volume (50,000+)
• Want stocks that have average daily volume of 1 million+
• Focus on above average volume
PAGE 8
Mastery Series Significant Gaps
Point 6 - Void
• Minimum of 3:1 reward/risk to next area of supply or demand on chart (void)
• The bigger the void the better
• The profit opportunity is the area from old supply, now new demand, to the next area of supply (the void)
PAGE 9
Mastery Series Significant Gaps
A professional gap can not be:
• An American Depository Receipt
• An issue that trades 24 hour markets (gld/slv)
• Gapping due to a buyout
• A stock with a daily chart that is “a mess”
• (lots of choppiness, long shadows etc)
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Mastery Series Significant Gaps
Key Factors To Consider
• Is there a reasonable spread between the bid and the ask?
• Don’t ask “why” - it’s not important. The why of the gap has already been factored in
• Gaps remove the need to clutter charts with indicators
• Price is only leading factor
• By the time a lagging indicator catches the price on a significant gap, the move hasalready happened
• Focus on price and Supply/Demand
• You need pre-market data for day trading gaps
PAGE 11
Mastery Series Significant Gaps
How To Find Significant gapsFree Resources
• www.nasdaq.com
• www.finviz.com
• www.thestockmarketwatch.com
• Your Trading software:
‣TradeStation
‣Think or Swim
‣ Interactive Brokers etc
PAGE 12
Mastery Series Significant Gaps
Simple Setup to trade gapsTrading Intra-day Gaps
• Identify & mark the demand/supply areas prior to gap day
• Identify & market pre-market demand/supply areas
• Rate the gap using the 5 simple steps
• Look for the wide range bars with increased volume
• Make sure the stock fits your trading plan:
• Stock price & bid/ask spread
• Sufficient 3:1 reward to risk
• Pre-plan your trade ideas before the market opens
Pull Back Trade Setup
• Quality trade setup - Buy or short @ supply or demand
• Focus on top 2-3 best gaps you identified pre-market
• Watch for wide range bars to form
• Look for a 2-3 bar clean (small wicks) pullback into 40% of wide
• Trade at or near reversal times from a 5 or 15 minute charts
• Confirm target to next supply area is greater than 3:1
• Hunt for a reversal candle - such as an engulfing or doji
• Buy above reversal candle and place stop below reversal candle
PAGE 13
Mastery Series Significant Gaps
PAGE 14
Mastery Series Significant Gaps