How to Recognize a Gap when Day Trading - dummies

How to Recognize a Gap when Day Trading

Gaps are breaks in prices that show up all the time in stock trend line charts. They usually happen when some news event takes place between stock trading sessions that causes an adjustment in prices and volume. Whether the news is about an acquisition, a product line disappointment, or a war that broke out overnight, it’s significant enough to change the trend, and that’s why traders pay attention when they see gaps.

A gap is a break between two bars.

A gap down often means it’s time to sell.
A gap down often means it’s time to sell.

Gaps are usually great signals. A security that gaps up at the open usually means a strong uptrend is beginning, so it’s time to buy. Likewise, if the security gaps down, that’s often the start of a downtrend, so it’s better to sell.

Day traders can get sucked into a gap, a situation known as a gap and crap (or gap and trap, if you prefer more genteel language). Many traders view the security going up in price as a great time to sell, so the day trader who buys on the gap up immediately gets slammed by all the selling pressure.

For that reason, some day traders prefer to wait at least 30 minutes before trading on an opening gap, while others rely on their knowledge of the buyers and sellers in a given market to decide what to do.