Today, you’ll not only learn about the basics of gap up opening stocks, but we’ll also give you an example of this. In addition, we’ll give you tips on how to take advantage of gap trading to help you make the most of it.
Gap trading basics
As mentioned earlier, gap up stocks is when the current day’s low price is higher than the previous day’s high price. This means there is a “gap” in the trading chart between the previous day’s high and low prices and the current day’s low prices.
Gap-ups are generally considered bullish because they indicate that the market has opened higher than the previous day’s close. And therefore, there’s buying pressure driving the stock upward.
However, it’s important to note that gap up opening stocks today can also be caused by a lack of trading in the stock the previous day. Another cause of this can also be a sudden influx of buyers due to company news or other factors.
What does gap-up stand for in stock market trading?
There are a number of factors that can lead to gap ups. These include:
- Positive news or earnings reports from a company
- An upgrade or a positive analyst recommendation
- A merger or acquisition announcement.
- General market conditions, such as a bullish trend or increased investor sentiment.
However, it’s important to note that not all gap-ups result in an upward trend. The stock price can also reverse and fall back down. This, therefore, means that you get both gap up and gap down trends.
When gap downs occur, it means the current day’s high price is lower than the previous day’s low price. Gap-downs are generally considered bearish and can signal the start of a downtrend for a stock.
Gap-up trading example
One of the best ways to understand something is by giving an example. Here’s one on gap trading. Let’s say you notice gap up opening stocks NSE traders are all talking about. And that stock is trading at $50 per share at the close of trading on Monday.
On Tuesday, the market opens, and the stock is trading at $55 per share, with no trading occurring between $50 and $55. This would be considered a gap-up. That’s because there’s a gap in the trading chart between the previous day’s high and low prices and the current day’s low price.
In this scenario, some traders may interpret the gap-up as a bullish signal and consider buying the stock at the current price. At this point, they believe that the stock will continue to rise. Others might wait for further confirmation, such as an upward trend or positive news, before making a decision.
Gap strategies in the stock market
There are several strategies traders can use to take advantage of gaps in the stock market. Some of the most popular gap strategies include:
- Gap and Go!: This strategy involves buying a stock that gaps up in the morning and then selling it later in the day for a quick profit. The idea is to capture the momentum that is driving the stock higher and then exit the trade before the momentum fades.
- Gap and Crawl: Here, you buy a stock that gaps up and then hold onto the position for a longer period of time to capture any additional upside. This strategy is best when the gap’s caused by positive news or fundamentals that’ll drive the stock higher in the long term.
- Gap Fade: This strategy involves short-selling a stock that gaps up. You do it with the expectation that the gap will close and the stock will return to its previous level. This strategy is best used when the gap is caused by hype or speculation rather than fundamentals.
- Breakaway Gap: Traders use this strategy to buy a stock that gaps up and breaks out of a resistance level. The expectation is that the stock will continue to rise. Use this strategy when positive news causes the gap up, and it’s accompanied by strong volume.
