Trading Gaps

We have talked many times on Simpler Stocks about how to trade gaps. Today, with good news from the all-important unemployment report, we got a huge rally from the get go.

Many stocks I watch opened up sharply, only to be followed by a short term sell-off from an overbought condition. How do you initiate a trade in these conditions? Let me give an example.

BA has been in “rally mode” since Wednesday morning. The gap open today cleared multiple moving averages on a 78 and a 15-minute chart. That was the first tip-off the up move could be sustainable.

BA Gap - 15 Minute Chart

The second key was the quality of the overbought sell-off. I never buy the first up move, as usually that results in an extremely overbought condition. I used a 133 tick chart to wait for the MACD to become oversold. As long as the stock stayed above the ATR trailing stop on a 5 minute, I was confident that BA would have another leg up. The key was to initiate the trade on the break above the ATR trailing stop around 128.50.

BA Gap - 133 tick chart

BA has never dropped under the ATR trailing stop on both timeframes even as I have been writing this blog. So far, this trade has been good for almost 1 and a half points!

Get more of Chris’s actionable trade recommendations and commentary HERE

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