Gap trading is one of the easiest and most enjoyable ways to get started day trading stocks. In case you don’t already know everything there is to know about trading gappers, we’re here to let you in on all the lingo you will need to know to get started trading the gap like a pro. Knowing these terms will help you navigate the tutorials, how-to’s, and day trading chat rooms like a pro.
Gaps occur when a stock price moves up or down quickly with little to no trading in the middle. This erratic trading results in a “gap” when you look at the stock’s asset chart. Those stocks are then referred to as gap stocks. A knowledgeable and enterprising trader will see gap stocks, interpret them, and exploit those gaps for profit. That’s called gap trading.
The first question everyone asks is what causes the gap. The gaps occur when a stock closes lower than it opens, called gapping up, or higher than it opens, called gapping down. For example, let’s say a company’s earnings are a lot higher that what was predicted, its stock price might gap up that day. How that happens is that the stock opens at a higher price than it closed the previous day. That creates the gap.
There are traditionally four types of gaps: breakaway gaps; exhaustion gaps, common gaps; and continuation gaps. We’ll go into more detail on the different kinds of gaps in another blog post we’ll be releasing soon here at http://warriortrading.com/gap-go/. But for now we just want to get you comfortable with the terminology.
If a gaps been filled, it means the price moved up or down to the pre-gap price. Fills are super common and usually happen because the initial spike was an irrational overreaction, there’s no technical resistance to support the price change so it goes back quickly, or it falls into a price pattern. If a gap is filled in the same day that it occurs it’s called fading.
Okay, so now you have the basic gap trading terminology under your belt and you want to learn how to leverage those gap stocks for profit. Head over to Warrior Trading and learn all the strategies and theories behind making money by gap trading. What terminology most confused you when you first started gap trading? Or, if you’re new to gap trading, what term are you unsure about? We’d love to hear from you in the comments section below.