Do you only trade gap stocks in the first 1-2 hour of the trading session every day? Did you ever notice that there are only really 4 main different types of stock market gaps every single day? Have you identified which types of gaps you perform better and which ones you should avoid? We are going to break down the 4 different types of gaps and hopefully, you can start to identify which gaps you perform better with.

The Gap and Go (GnG)


There are two types of Gap and Go’s. The Bullish Gap and Go, and the Bearish Gap and Go. Let’s examine the key difference between the two.

Bullish Gap and Go

A Bullish Gap and Go is when a stock is gapping up from the previous trading session where in the previous trading session ended negative for the day. This can be a powerful signal if the last few days have been negative and suddenly a stock is gapping up above all those previous days. Any trader who is short the stock is now effectively trapped. When traders are trapped one of two things will happen: 1) Their stop loss will be hit and they will need to buy to back their short position, 2) If they do not have a stop loss, fear might set in and they will also close out to cut their losses.

So with those traders having to buying back their shorts, plus the additional bullish sentiment from other market participants, Bullish Gap and Go’s generally move VERY fast in the first minutes of the opening bell.

Examples of Bullish Gap and Go(GnG):
Bullish GnG 1

 

Example of an excellent Bullish Gap and Go(GnG):
Bullish GnG 2

Here we can see that the previous days have mostly be down which means many short traders are trapped.

Bearish Gap and Go


A Bearish Gap and Go is when a stock is gapping down from the previous trading session where in the previous trading session ended positive for the day. This can be a powerful signal if the last few days have all been positive and suddenly a stock is gapping down below all those previous days. Any trader who is long the stock is now effectively trapped. When traders are trapped one of two things will happen: 1) Their stop loss will be hit and they will need to sell their long position, 2) If they do not have a stop loss, fear might set in and they will also close to cut their losses.

So with those traders having to sell their longs, plus the additional bearish sentiment from other market participants, Bearish Gap and Go’s generally move VERY fast in the first minutes of the opening bell. However once a stock reached -10% of the day, the uptick rule sets in (otherwise known as SSR or short sale restriction). This means that you can only short the stock in an uptick of the stock.

Examples of Bearish Gap and Go(GnG):
Bearish GnG 1

 

Example of an excellent Bearish Gap and Go(GnG):
Bearish GnG 2

Here we can see that the previous days have mostly be up which means many long traders are trapped.

The Retest Gap


There are two types of retest gap’s. The Bullish Retest Gap and the Bearish Retest gap. Retest gaps are the most common types of gaps. Let’s examine the key difference between the two.

Bullish Retest Gap

A Bullish retest gap is when the stock is gapping up from the previous trading session where the previous trading session ended positive for the day. When this happens that means that the bullish sentiment is still there from the previous trading day. If the stock has been moving up for several days or the gap is really big, then it is safe to say that many traders will be very profitable and will sell their long positions to lock in a profit.

When many traders are selling to close their positions, we can expect to see some down movement in the first hour of the trading session. Generally we will see the stock retest a support (could be previous day high, pre-market low, a moving average, etc). To make best of this type of gap, we recommend traders to wait for the retest then place their trade when the risk to reward ratio favours them.

Examples of Bullish Retest Gap:

Bearish Retest Gap

A Bearish retest gap is when the stock is gapping down from the previous trading session where the previous trading session ended negative for the day. When this happens that means that the bearish sentiment is still there from the previous trading day. If the stock has been moving down for several days or the gap is really big, then it is safe to say that many traders will be very profitable and will buy back their short positions to lock in a profit.

When many traders are buying back their positions, we can expect to see some up movement in the first hour of the trading session. Generally we will see the stock retest a resistance (could be previous day low, pre-market high, a moving average, etc). To make best of this type of gap, we recommend traders wait for the retest then place their trade when the risk to reward ratio favors them.

Examples of Bearish Retest Gap:
Bearish Retest 1

Now that you know the 4 main different types of gaps, I would recommend that you start logging these details in your trading journal. After some time you can look back and see which types of gaps you trade best. Use this knowledge and focus on improving your trades and getting more from the market. You can also look at using the power scanning software tool Trade-Ideas to help you quickly identify the best looking gaps and the stocks in play.