Gap Trading – Safest Tips and Techniques: Gaps stock trading is a great way to make some extra bucks. Almost daily, a bunch of financial instruments open with a gap up or down. While smaller penny gaps should be avoided, a significant gap in an excellent potential opportunity for day traders. If you are not aware fully about differences, then we would suggest you have a look at this article first!
In this article, we would cover three amazing gap trading techniques. After that, some tips to help you a bit extra in trading, followed by a conclusion.
3 Safest Gap Trading Techniques
1. Filling Strategy
It is the safest gap trading strategy. It always doesn’t inspire all the traders but surely is in the bucket list of many. Filling plan waits for the gap to fill itself. For instance, if an asset gets closed at $45 and starts trading at $50, with a $5 gap, then let it fill again.
Once the gap would be filled, the chances are the asset would start to rise again and this time with no looking back. The reason behind this is, the asset which can cause a gap would quickly grow, and that gap fill is the lowest point it would touch.
Although, by following this strategy, you might miss many golden opportunities to earn money.
2. Options Strategy
Gaps trading is a risky and volatile method to profit. And, that’s why the options strategy works the most effectively here. Options trading allows a trader to profit, even if he feels that price would fall, using put options.
Call and Put are the two trading methods in options trading.
A Call option is the right to buy any asset at a predefined price on a preset date, no matter what the cost of the asset is, that day. Thus, if you feel that any stock is going to rise in the upcoming time, then take the call option. Also, the best thing about call options is if the price of the asset doesn’t rise, or say falls, then you can nullify the contract.
Similarly, the Put option is the right to sell any asset at a predefined price on a preset date, no matter what the cost of the asset is, that day. Thus, if you feel an asset would fall, then go for the put option. The stock’s price would fall (as per your prediction), but you will purchase the right to sell the asset at the put option price. And don’t worry; put option prices are very similar to the current prices of the asset.
Thus, if you buy a put option asset today and the stock falls on the next day, you have the right to sell it at yesterday’s price.
It is the best and the most popular technique to trade gaps.
3. Spread Gap Trading Strategy
The last strategy on our list is the spread trading strategy. In forex, the spread is the difference between ask and bid price. In gap spread trading, you buy one asset and sell another, and the difference is your profit, and this profit is the spread.
This strategy works very well on the breakaway gaps, where the trend is most probably known. Make sure to double earn using this strategy, one, from the stock you’ll sell, and second, the one you’ll buy. Any mistake in any of the assets can decrease your profits.
It is an instant-profitable and protected strategy to play with gaps; however, the profits are very less. Thus, either you need to put some extra bucks, or you need to purchase the asset with additional leverage.
So, these were the three best techniques to trade gaps. And, adding them to your strategy list can make you earn profits, as the gaps are very volatile, and these techniques are either risk-free or very less risky. The combination of volatility and low risk can make you earn a slow but steady income.
But, being aware of these techniques is not enough. You can still fall for many traps. The traps are created by financial investors and influencers to earn money. Therefore, here are some tips for you.
Gap Trading Tips (Not General)
- Do not start trading or go long, as soon as you see a gap. Wait and confirm the trend. You can observe the asset until 10:00 am and then start playing. You can analyze the first candle in a candlestick chart, to be extra sure. It is a good indicator.
- Use stock screeners to analyze and spotting the assets.
- In any case, if the favorable outcome is not achieved, exit the trade market before closing. A stock which did not perform today has no confident prediction.
- Be wary of more than 1% gaps, whether up or down. If you spot any stock of more than 1% gap, take the favourable action.
- Before investing, look for the trading volume. Usually, avoid a low-volume asset’s gap because of the risk factor.
The Final Say – Gap Trading
Gap trading techniques is not as complicated as people think. It is quite simple; it is all about making small earnings during a day. Moreover, you do not need much to profit from gap trading, just some basic knowledge, which you will get here. And, some techniques and tips to follow with discipline.
You can use any technique out of the above or can also come with a combination. The primary line is to go with the strategy that works best for you.
At last, practice makes a person perfect. Thus, to avoid losses, you can start trading in a virtual account, or at least do not begin with a large chunk. Instead, go small!