A trailing stop is simply an exit threshold that follows the rising price or falling price in the case of short positions. Once a position is entered, you calculate and set an 8% trailing stop to exit a long position, and a 4% trailing stop to exit a short position. A Modified Trading Method, to be discussed later, can be used with any of the eight primary strategies to trigger trades before the first hour, although it involves more risk. The basic tenet of gap trading is to allow one hour after the market opens for the stock price to establish its range. The red arrow on the chart for Offshore Logistics (OLG), below, shows where the stock opened below the previous close, but not below the previous low.Įach of the four gap types has a long and short trading signal, defining the eight gap trading strategies. The next chart for Earthlink (ELNK) depicts the partial gap up on June 1 (red arrow) and the full gap up on June 2 (green arrow).Ī Partial Gap Down occurs when the opening price is below yesterday's close, but not below yesterday's low. The chart for Amazon (AMZN) below shows both a full gap up on August 18 (green arrow) and a full gap down the next day (red arrow).Ī Partial Gap Up occurs when today's opening price is higher than yesterday's close, but not higher than yesterday's high. In the chart below for Cisco (CSCO), the open price for June 2, indicated by the small tick mark to the left of the second bar in June (green arrow), is higher than the previous day's close, shown by the right-side tick mark on the June 1 bar.Ī Full Gap Down occurs when the opening price is less than yesterday's low. Although those classifications are useful for a longer-term understanding of how a particular stock or sector reacts, they offer little guidance for trading.įor trading purposes, we define four basic types of gaps as follows:Ī Full Gap Up occurs when the opening price is greater than yesterday's high price. That is, the difference between any one type of gap from another is only distinguishable after the stock continues up or down in some fashion. Although most technical analysis manuals define the four types of gap patterns as Common, Breakaway, Continuation and Exhaustion, those labels are applied after the chart pattern is established. A gap is a change in price levels between the close and open of two consecutive days.
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