Gap continuations are the strongest chart pattern available to trade. When multiple gaps occur over a timeframe of several weeks, especially strong buying pressure is seen, providing excellent swing trading opportunities. In this article, you’ll learn how to trade multiple gaps when price action continues upwards on a 90-day candlestick chart.
Trading After The First Gap
Following a gap up in price (usually due to positive earnings, or good news), continuations often occur which you can trade on strength. However it’s common to miss seeing an initial gap up – so how do you identify second trading opportunities, after the first gap?
In Figure 1, Weight Watchers Inernational Inc. (WTW) following good news, you can see 2 gaps. The first occurrend on October 19th, in which price gapped up from $7/share to $11/share. After an intial gap continuation to $20/share and a subsequent pullback and consolidation, WTW gapped up again to $21/share and continued upwards a second time.
There’s several techniques that you can use when swing trading multiple gaps:
a) Buy during the week following both 1st and 2nd gaps:
Using buy-stop orders from at fifty cents or so above the high of the first and second gap days can help you initiate two new long trades.
b) Anticipate a pullback on the 1-2 days following a gap: Expect price to chop around and consolidate following the first gap, as occurred in Figure 1. By waiting until after price continues upwards at least fifty cents above the high of the high-of-day on the gap day, you can potentially avoid false breakouts.
c) Plan on entering after 2nd gap days: Seeing a sequence of 2 or more gaps indicates especially strong institutional money flow at work, so you should seek to capitalize on this price action. Even if you miss the first gap, you can still swing trade following second and third gap days.
Trade Planning with Multiple Gaps
Using position sizing (or “scaling”) can also help you leverage your trades by entering two or more times, adding to a winning gap continuation trade. By putting on a small “pilot trade”, or test trade of just 20 – 100 shares initially, following the first gap, you minimize your upfront risk. Then adding a second small-size trade after the second gap puts you into a more solid position, so you may be in say 40 – 200 shares after your second entry. Move a stop to breakeven following your second trade, and trail a stop $2 or so under the current price, to lock in your profit on the trade.
In upcoming articles we’ll continue to explore additional gap and breakout trading strategies used by professional traders.
Recommended resource: For more on using this and other trading strategies, see the author’s complimentary Saturday “Trading Week Ahead’ webinar events at http://TradeMastery.com/free/
Ken Calhoun is a trading professional who has traded millions of dollars of equities since the 1990s, and is the producer of multiple award-winning trading courses and video-based training systems for active traders. He is a UCLA alumnus, MoneyShow speaker and founder of TradeMastery.com and StockTradingSuccess.com (with Steve Nison), popular online educational sites that reach tens of thousands of active traders worldwide.
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