Buy Signals Sell Signals: Strategic Stock Market Entries and Exits pdfdrive com

Trading opening price gaps up over the previous trading range
- Buy a gap up in price at the end of the day with a stop loss at the low of the gap
up day.
- Use a close under the previous day’s low as your trailing stop.
- Buy into a morning gap with a 1 ATR (14) as your stop loss. Take profits that
day into the rally or hold it with a 2 ATR trailing stop or a close under the
previous day’s low.
- Generally the higher the percentage of gap above the old price, the lower the
odds of a winning trade.
- Buying opening gaps in price above the previous trading range work better in
bull markets and less in bear markets because stocks are under accumulation in
bull markets.
When a market opens with a gap up out of a trading range it confounds many
traders. They don’t understand how the price can gap up to a whole new trading
range, stay there all day, and even go higher through the day. If the gap is out of
an oversold level, there is a high probability of trade entry as a new trading range
is established with the potential of a new uptrend. If a gap up doesn’t fill in the
first hour and a half of trading, the odds are it will just keep going in that
direction for the remainder of the day. Shorting momentum is generally a bad
idea, and shorting a gap up is not a signal, it is an opinion unless the gap is into
an overbought area like the 70 RSI. Gap ups tend to work better in long-term
uptrends than when the market is in a downtrend.
What causes these situations? They are generally psychological and not
based on fundamental valuation changes:
- Gaps in prices can be one of the strongest indicators of momentum, and while
most are using gaps as an opportunity to get out of a winning trade, many times
it is a great entry signal and the beginning of a strong trend in the direction of the
gap.
- Gaps work best in growth stocks especially after earnings are reported when
they go into an accumulation phase.

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- A gap signals momentum and that nobody was willing to make a trade in the
empty gap that is created in the chart. Think about the fact that there were no
bids or asks except at the opening gap price.
- Gaps can be bought at the open for a possible quick gain and good entry, but
there is still a possibility that the gap could collapse violently. Better odds are to
wait for the gap to hold for the first hour of trading and then make an entry. You
may get a better entry on a pullback and avoid being caught if the gap fails and
price collapses. I like to buy gaps at the end of the day for the highest probability
that it’s a gap and go, and not a gap and crap.
- Gaps in times of high volatility don’t tend to hold and trend as well as a gap out
of a clean price base.
- A gap off a key moving average or one that opens over a key moving average
has a better chance of success than a random gap.
- A gap into all-time highs is especially powerful with all holders now profitable.
The gap tends to continue with every holder letting the profits run.
- Shorts caught in gaps can add fuel to the fire of the trend as they are forced to
buy to cover.
- A great place to set a stop is just under the low of the gap up day; price should
not breach that level if it is going to trend. Using an end of day stop gives you
better odds of not being shaken out if it just dips there temporarily.
- After the low of the day holds and a trend begins over multiple days, then the
trailing stop could be moved to the 10-day EMA and then the 5-day EMA late in
the trend to lock in profits, but allow the trend to continue in your favor.
- Also be aware that a momentum growth stock that gaps up don’t have long-
term resistance, they tend to pause and make higher highs. Overbought
indicators are not helpful in analyzing momentum growth stocks under heavy
accumulation by money managers.
- When caught on the wrong side of a gap, it’s best to get out in the first 30
minutes. If the gap holds and makes higher highs after the first hour and thirty
minutes of the trading day, it is likely to get worse as the day goes on.
Gaps have a way of leaving so many retail traders on the sidelines because they
don’t want to chase. Some of my biggest winners buy into gap ups with the right
position sizing and let the winners run.

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