Low price gapping plays are a popular strategy in stock trading, especially for day traders and swing traders. This strategy involves trading stocks that have experienced a significant price gap between the previous day’s close and the current day’s open. Here’s a comprehensive guide on how to approach low price gaping plays:
Understanding Price Gaps
A price gap occurs when a stock opens at a significantly different price than its previous closing price. There are several types of gaps:
- Common Gaps: These are not associated with news or significant events and often fill quickly.
- Breakaway Gaps: Occur at the start of a trend, usually driven by news or earnings reports.
- Runaway (or Measuring) Gaps: Happen during a strong trend and indicate the continuation of the current trend.
- Exhaustion Gaps: Appear near the end of a trend and signal a potential reversal.
Criteria for Low Price Gapping Plays
- Stock Price: Typically under $10. These stocks are more volatile and can offer significant percentage moves.
- Volume: High trading volume indicates strong interest and liquidity.
- Catalyst: Look for a news event, earnings report, or significant announcement driving the gap.
- Gap Size: A substantial gap, often at least 5-10% from the previous close, but this can vary based on your risk tolerance and strategy.
Steps to Trade Low Price Gapping Plays
- Pre-Market Research: Identify potential gappers using a stock scanner. Look for stocks with significant pre-market volume and price movement.
- Analyze the Catalyst: Understand why the stock is gapping. Is it due to positive earnings, a new product launch, regulatory approval, etc.? The strength and nature of the catalyst will influence the stock’s intraday performance.
- Technical Analysis:
- Support and Resistance Levels: Identify key support and resistance levels from previous trading sessions and pre-market activity.
- Chart Patterns: Look for patterns that might indicate the stock’s next move, such as flags, pennants, or head and shoulders.
- Plan Your Trade:
- Entry Point: Decide where you will enter the trade. Many traders wait for the first few minutes of trading to observe the stock’s direction.
- Stop-Loss: Set a stop-loss to manage your risk. This could be just below the gap or another key support level.
- Profit Target: Determine your profit targets. This could be based on technical levels like resistance or a percentage gain.
- Execution:
- Opening Range Breakout: One popular strategy is to trade the breakout of the stock’s high or low during the first 15-30 minutes of trading.
- Fade the Gap: Another strategy is to trade against the gap direction if you believe the gap will fill (i.e., the price will move back towards the previous close).
- Monitor the Trade: Stay vigilant and adjust your strategy based on how the stock is performing. Be prepared to take profits or cut losses quickly.
Example Scenario
- Stock XYZ closed at $5 the previous day.
- Pre-market news reports a successful clinical trial for a new drug, causing the stock to gap up to $6.50.
- Pre-market volume is significantly higher than usual.
- Chart analysis shows the next resistance level at $7 and support at $6.
Trade Plan:
- Entry: Buy at $6.60 after confirming strong buying volume.
- Stop-Loss: Set at $6.20 (below pre-market support).
- Profit Target: First target at $7 (resistance level) and then trail stop to capture further gains.
Tools and Resources
- Stock Scanners: Use platforms like Trade Ideas, Finviz, or the scanning tools provided by your brokerage.
- News Feeds: Stay updated with real-time news through sources like Benzinga Pro, Seeking Alpha, or Bloomberg.
- Trading Platforms: Utilize platforms like Thinkorswim, E*TRADE, or Interactive Brokers for charting and executing trades.
Tips for Success
- Stay Disciplined: Stick to your trading plan and don’t let emotions drive your decisions.
- Keep Learning: Market conditions change, and continuous learning is essential. Follow experienced traders, join trading communities, and stay updated on market trends.
- Risk Management: Never risk more than you can afford to lose. Proper risk management is crucial for long-term success.
By following these guidelines and consistently practicing, you can improve your ability to successfully trade low price gapping plays.