What is a Gapper in Stocks?

What is a Gapper in Stocks?

A gapper or gap in trading stocks is a simple approach to buying and shorting stocks. In simple terms, a person will look for stocks with a price gap from the previous close and observe the stock for the first hour of trading to identify the trading range.

If the stock rises about a range, then you would buy.

If it falls below, it signals a short.

What are the different types of Gaps?

A gap is a change in the price of a stock between the open and close of two days in a row. Most people use four types of gap patterns for technical analysis: Common, Breakaway Continuation, and Exhaustion, which are labeled after the chart pattern is established.

Common – Common gappers in stocks occur frequently and have very little significance as the price is only slightly different from the closing price on the previous day.

Breakaway – Breakaway gappers happen when the stock price moves above or below a significant resistance or support area on the gap. It can happen when the price has been consistently in a tight range and moves away from its typical pattern. The breakaway gap can indicate the start of a strong trend that follows over the next few weeks.

Runaway – Runaway gappers happen during a strong trend and show that the trend will cause a gap in the trend direction. The gaps are typically significant, and the price almost always follows through, moving in the gap direction over a few weeks.

Exhaustion Gaps – Exhaustion gaps occur at the end of a trend, usually caused by stragglers jumping in late in the game. Once the price gaps are higher during this last push, few people are left to keep pushing the price in the trend direction, and a reversal follows within the next few weeks.

Gapping trading strategies

Many traders use gaps for trading purposes and enter positions after a gap occurs. This technique is called “playing the gap. Here are a few common strategies traders use.

Buying the Gap (Up)– This is commonly referred to as “gap and go.” Traders take a position on the day the stock gaps with a stop loss are usually placed on the low point of the gap bar.

Selling the Gap (Down) – This is similar to the gap and goes strategy, except the trader will enter a short position following a gap down.

Fading the Gap – This strategy involves traders trading in the opposite direction of the game under the idea that most gaps tend to be filled over time. A stop-loss order is placed above the gap high point and following a gap up, with a target of the previous day’s close.

Gaps as an Investing Signal – Breakaway and runaway gaps can signal more trends left to take advantage of. A long-term trader may initiate a position in the direction of the gap and hold on until an exhaustion gap occurs.

Gap trading is an excellent strategy to learn and is great for beginner traders. Finding gappers in stocks is a great way to find big profits while managing your risk responsibly.

Did you know?

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