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Wednesday, January 1, 2014

5 gap trading tips for beginners

Gap trading
Four trading techniques are used in gap trading
The first piece of advice for getting started in gap trading is that this does not require a degree in rocket science to do once you learn the basic terminology, know the amount of capital you have to work with and take appropriate action. 

Although in the beginning some decisions will not reap large profits and may result in some loss, bear in mind that nothing ventured definitely results in nothing gained. Day traders regard gap trading as an invaluable tool with the capacity to indicate when to move and in which direction.

According to information at Investopedia, the gap is often referred to as the gray area or space that exists as no price rise or fall occurs during a period of no trading activity. Obviously there are two options involving financial instruments, an up trend happens when the market opens for a particular instrument wherein the opening price is higher than the previous day's close. A down trend occurs when the previous day's close is lower than the previous day's highest price.

The four categories of gaps are: breakaway, exhaustion, common/measuring and continuation. Breakaway is the space between the price pattern ending and the beginning of a new movement trend. At the end of the pattern, exhaustion occurs. At this point an attempt must be made to find the space between the new high and low price. The common/measuring gap occurs when the movement does not fit or fall within any pattern. To some experts, the space between the measuring gap and the exhaustion is regarded as an iffy zone. At this juncture, it is paramount to pay attention to activity volume as a clue to when the next exhaustion gap is likely to occur.

Continuation happens somewhere near the middle of a price pattern. This event is characterized by a frantic period of purchase and sales activity most often said to stem from hunches and/or suggested analytical predictions relative to price movement.

During a trading day, gaps are said to be filled when the price is equal to the pre-gap activity level. Serious gap traders focus on cash flow statements to predict when sales will drop in the direction of the previous day price close at which point the gap is said to be filled.

Once your comfort zone of knowing what gaps are and basically how they work exists, it is time to follow five basic gap trading guidelines for beginners: 
Step 1. Select a stock or other financial instrument and focus you total concentration on all things pertinent to that instrument.

Step 2. Watch that stock's activity for one hour, preferably at opening of the traditional market day, to zero in on the rise and fall movement. Adopt one of two options, long position or short position. For long position, it is advisable to set your exit at eight percent below the purchase price. In short position, set the exit buy-to-cover price at four percent above the price paid. A price drop indicates the time to reset the stop at four percent above that figure.

Step 3. Analyze the range and set exit positions. Full Open Gap (long) indicates that if the open price is higher than the previous high, long-stop should be set two ticks or points above that price. Applying this same rule to Short Up Gap, the stop should be set two ticks beneath the open price. Many regard the Full Gap Down as a “Dead Cat Bounce,” because the price should lie beneath the current day's close and beneath the previous day's low. The best option in this case is to set the stop two ticks under the first hour's low.

Step 4. Caution flags must be considered when the open is above the prior day's high. This activity should be watched for two days because demand is high and orders are still left unfilled. Floor agents have been known to make big price alterations in this situation. While a partial gap creates less demand, a small alteration can trigger heightened buy/sell activity.

Step 5. Visit this site for additional tips on gap trading. In the beginning, many traders wait too long to sell when the price is moving upward, to buy when the price is descending and above all to cancel all no-fill orders before the market opens for the day.