Trading Gaps

Discussion in 'Technical Analysis' started by tttinvest, Mar 13, 2004.

  1. I have a question for everybody. Within the last six months, I received an email from Ken at Daytraderuniversity(I think) He wanted to know if I had traded RIMM on the gap and if I had been on his site or studied with him, I would have gotten it. I want to learn how to trade these gaps. I received an email from the candlestickforum.com and this is what it said:

    AVII I know everybody is tired of hearing about this one, but it is forming a buy signal after a gap down at the bottom on big volume. This is the classic blow off at the bottom were all the weak have finally sold their stock. Do not be afraid to buy some here and add to your long term accounts.

    I thought that a gap down represented a resistance point now. Was I wrong? Any help would be appreciated.
     
  2. Trading Gaps is VERY difficult.

    I would highly recommend you stay away from them unless you have many years exp.


    Just use them for what they are a support or resistance number.
     
  3. the best advice on gaps i've ever heard (from Ramoutar) is that gaps:

    1) show unstable movement, dangerous

    2) do not necessarily have to be filled in

    3) show that there is no resistance on the way back from the direction of the gap. again dangerous.

    So, like samson said, trading gaps are very hard to trade.

    -m.o.
     
  4. Cheese

    Cheese

    Gaps.. overall very significant.

    But gaps .. got to know when and when not to pay attention to them for the days trading ahead. By gap (ie DOW) I mean the Opening gap down or gap up from the previous Close .. obviously you will say: just being clear though.

    Instinct applied to gaps won't help. Now sometimes a small gap is a good indicator for the next worthwhile move coming up as can a big gap be

    Summary. You do your research. You set up your trading model. Do all that and you should know when to use a gap as a guide to buy or sell. Now there will also be many times when the gap is not a good indicator. You will know this from other criteria in your system.
     
  5. Wow! I didn't realize that gaps were that tough. I guess I will watch the action around the gap and I will not use them as a sole inclination to make a trade. Thanks guys for the replies. Is there any place out on the net that shows more about gaps without having to pay $5000 and flying to San Diego for a seminar?
     
  6. Indeed gap playing is hazardous, just as trying to catch a falling knife.

    2 observations however :

    1- it is clear that ALL the gaps are not necessarily closed but MOST OF THEM are, and usually in the 3 to 5 following days before starting again in the direction of the gap.

    2 - When a gap is not closed in the 3 to 5 following days, the gap zone becomes an important support / resistance.

    Try to adapt this to your software:

    http://www.guppytraders.com/Metastock Formulas/metastock formula 10.htm

    and scroll down to " GAP "

    or

    http://trader.online.pl/MSZ/e-st-Gap_Systems.html


    Regards,
     
  7. Yes .... your looking at it right now. :)

    The best place to learn about gaps is screentime.

    There are many reasons why the futures gap open unfortunately I have yet to find a book or course that is consistent in teaching traders how to trade them.

    I trade them purely off instinct and experience and to be totally honest with you I am wrong as much as I am right, so I'm not the best guy to help you out. Even at a 50% win rate on them after 10 years of active trading I consider myself lucky.

    :(
     
  8. Brandonf

    Brandonf ET Sponsor

    Gaps can be extremely profitable if you know how to trade them. If you dont and you try your profits will go to someone else.

    I have hundreds of posts on ET about gaps. Here are a few threads.

    http://www.elitetrader.com/vb/showthread.php?s=&threadid=8127


    http://www.elitetrader.com/vb/showthread.php?s=&threadid=14135

    BTW, there is great money in daytrading the gaps, but in exceptional stocks there is even more money in owning them. For example I paid $60 for RIMM on Dec 23. I still own it and have added too it several times on pullbacks. On 2/18 I paid $52 for BIIB and just recently sold it @55 as the market has started to act poorly. TGT on Thursday another example of the same thing. In order to hold them though you need ot know something about the company and the nuts who might help keep it propped up.

    Brandon
     
  9. dbphoenix

    dbphoenix

    Have you updated your statistical studies, Brandon? They don't seem to be holding up particularly well (from a purely empirical viewpoint).
     
  10. Brandonf

    Brandonf ET Sponsor

    The raw numbers have changed as far as the percentages go and I have stopped updating them simply because I don't think that its worthwhile since things change so much. The basic concept holds as true as ever. Large gaps dont fill, small gaps do, double gaps, triple gaps etc. I just watch them daily and get a feel for how much we are typically gapping.

    Brandon
     
    #10     Mar 14, 2004