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

Chris Brecher

Chris Brecher Stock Vice President

Chris Brecher grew up in Jacksonville, Florida. Though he went to college for Paleontology and Marketing, he settled for being a Stock Broker. In watching the brokers in his office lose every time by taking shots in options, Chris wanted to find out who was making money on the other side.

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