Traders are always asking me about how to view the gaps and what are the trading opportunities associated with them. Well, I’m not going to give away all the secrets in an online article; you have to attend one of Online Trading Academy’s courses or the Extended Learning Track to discover them, (collective sigh of relief from all students) . However, I will share one thing to watch as you are looking at whether the gaps will fill quickly.

Gaps are caused by large imbalances between buyers and sellers. Think of a stock that releases great news or beats earnings estimates after the stock market has closed for the day. There are likely to be an abundance of buy orders flooding in from retail traders and investors when they hear the news. Most novice traders wouldn’t even consider selling on the good news. This will cause an imbalance between the number of buy orders and the number of sell orders at the open the next morning.

When a broker or market maker receives that large number of buy orders, they want to fill those orders to receive commission. You will typically see the bids and/or offers move upward just before the open so that when the market opens it will open near to a prior supply level. This supply level will have plenty of sell orders to fill the retail buy orders.

Once the retail buy orders have been filled, there is often a lot of supply left and prices begin to close the gap. In our classes, we teach that a trader should center their decision to buy or sell based on the price in relation to supply and demand. Combining gaps with the supply and demand knowledge offers a powerful price direction indicator.

Looking at the intraday chart of Biogen, we can see that price opened up just short of a supply zone. The large amount of buying pressure that caused the price to open higher was immediately absorbed by the selling pressure at supply. A trader watching this would have been able to capitalize on the quick drop in price.

Stocks

It is important to check and see if price is gapping into supply or just above it. If price had gapped above the supply zone, the gap would have been less likely to fill and a rally would have likely ensued.

The opposite reaction occurs if price gaps into, but not past a demand level. Looking at the intraday chart of Akamai, you can see that price dropped and moved into a demand zone.

Stocks

The smart trader would have noticed that the price simply gapped down to a prior demand zone and the buyers waiting there easily absorbed the selling pressure of the amateurs and sent prices higher. Be sure to pay attention to where price gaps into and practice good risk management. Do not gamble and take positions prior to the announcements and do not let your emotions get the better of you and jump into a stock before it hits a reversal point. Until next time, trade safe!

You can find out more about the stock market, and how to trade, starting with a free Power Trading Workshop at Online Trading Academy. Classes are held on a regular basis at our local financial education centers and online.

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Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.

Editors’ Picks

EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates

EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates

Unimpressive European Central Bank left monetary policy unchanged for the fifth consecutive meeting. The United States first-tier employment and inflation data is scheduled for the second week of February. EUR/USD battles to remain afloat above 1.1800, sellers moving to the sidelines.

GBP/USD reclaims 1.3600 and above

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

USD/JPY gathers strength to near 157.50 as Takaichi’s party wins snap elections

USD/JPY gathers strength to near 157.50 as Takaichi’s party wins snap elections

The USD/JPY pair attracts some buyers to around 157.45 during the early Asian session on Monday. The Japanese Yen weakens against the US Dollar after Japan’s ruling Liberal Democratic Party won an outright majority in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi. 


Editors’ Picks

USD/JPY gathers strength to near 157.50 as Takaichi’s party wins snap elections

USD/JPY gathers strength to near 157.50 as Takaichi’s party wins snap elections

The USD/JPY pair attracts some buyers to around 157.45 during the early Asian session on Monday. The Japanese Yen weakens against the US Dollar after Japan’s ruling Liberal Democratic Party won an outright majority in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi. 

EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates

EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates

Unimpressive European Central Bank left monetary policy unchanged for the fifth consecutive meeting. The United States first-tier employment and inflation data is scheduled for the second week of February. EUR/USD battles to remain afloat above 1.1800, sellers moving to the sidelines.

Gold: Volatility persists in commodity space

Gold: Volatility persists in commodity space

After losing more than 8% to end the previous week, Gold remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000. The US economic calendar will feature Nonfarm Payrolls and Consumer Price Index data for January, which could influence the market pricing of the Federal Reserve’s policy outlook and impact Gold’s performance.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

US NFP and CPI data awaited after Warsh’s nomination as Fed chief. Yen traders lock gaze on Sunday’s snap election. UK and Eurozone Q4 GDP data also on the agenda. China CPI and PPI could reveal more weakness in domestic demand.

Three scenarios for Japanese Yen ahead of snap election

Three scenarios for Japanese Yen ahead of snap election Premium

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans. 

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