Tips For Day Trading Large Gaps

If you are looking to add some another trading strategy to your arsenal, you may want to consider learning day trading large gaps. This form of trading is very common and a great way to turn a profit as there is generally more volatility and a larger range which is exactly what day traders want. Today, we are going to learn more about large gap trading and how it just might benefit you.

So make sure to take some notes and pay close attention to the information you’ll find below. You just might learn something that can help improve your trading skills.

What Is Considered a Large Gap?

In technical terms, a large gap is a gap that is usually at least 5% from the previous days close but what separates good gapping stocks versus bad ones is volume. You want stocks that are gapping on strong volume, at least 100k shares.

That means a lot of traders are watching and will likely provide plenty of range throughout the trading day to take advantage of. However, you want to make sure to avoid buyouts as buyout prices are predetermined which will leave the stock trading around that price range and that is of no use to day traders.

The Large Gap Set Up

There are two main strategies for trading gaps and that’s either a Gap and Go momentum play or a No New High play that you would fade as a short.

No New High

In the above chart of $AAPL we have a No New High play that happens when a stock forms a defined resistance or top in after hours trading like it did at $160 and when the market opened shares failed to continue higher. This shows weakness and means the stock is likely to fall. You want to see it make a push like it wants to go higher but then is sold back off and closes below VWAP. Once you see this pattern form you can look to short the weakness with a stop above highs.

Gap and Go

In the above example, $NFLX had crushed earnings and ramped up in the after hours session. There was a bit of consolidation in the morning before buyers finally stepped in and took prices up fast. Ideally you want to see this rip right out of the gate but sometimes on large gaps like this there will be a lot of profit taking and buyers trying to get long which will cause some sideways action.

Once that clears up though, the winning side will move prices quickly like in this example. A good entry would have been on the 30-minute opening range breakout after the stock put in a higher low. This gave it enough momentum to push through premarket highs and all the way into the mid $180s before pulling back.

Tips for Trading a Large Gap

When you begin your trading day as a large gap trader, you will need to look for important levels in the pre-market price action to trade against. This will help you prepare for the trade and give you the upper hand when things become live and active.

Search the daily chats for resistance and support: For those who trade large gaps, you will often find great information in daily charts. While scanning daily charts, look for areas of longer support and resistance. This will help you identify large gaps that you can take advantage of.

While looking at the market, try to figure out how other traders have positioned themselves. This information can help you predict what they may do during the gap, giving you a chance to make a profit. Those traders who are good at predictions are the ones who profit the most from large gaps.

Practice Makes Perfect

Now that you know what large gap trading is and how you can take advantage of it, you should get out there and practice trading. Learning how to properly trade large gaps before you trade with real money will help make you become a better trader without risking your hard-earned money.

It’s also important when you go live to trade with small size. Large gappers can be extremely volatile which means you can lose a lot of money very quickly if you aren’t prepared.