Mastery Series Significant Gaps

Significant Gaps This Lesson: • Significant vs. Insignificant gaps • Rating significant gaps • Finding significant gaps • impacts on indicators • Trade Setups with Gaps

Significant vs. insignificant gaps Significant gaps are unique • Reflect shock value • Sudden imbalance of price • Leads to emotional and irrational action • Change the landscape of the patterns • Reflect that are in play Questions to consider • Where is the gapping from? • Is greater than average? • Where is it gapping to? • What are the indices doing? • Is the gap clearing supply/demand? • Is there a void ahead? • Are traders “trapped” in the recent short term?

PAGE 1 Mastery Series Significant Gaps

Two types of significant gaps: You do not need a bunch • Professional Gaps of fancy names for gaps. A • Amateur Gaps gap is either professional or amateur. Keep it simple. Professional Gaps • Has a greater probability of continuing in the direction of the gap. • Applies to day of gap and short/intermediate move immediately following gap. • Provides a very high probability trade setup for both day trading and swing trading. Amateur Gap • Has greater probability of moving in the opposite direction of the gap. • Applies to day of gap and short/intermediate move immediately following gap. • Provides a very high probability trade setup for both day trading and swing trading.

How To Rate Significant Gaps Significant gaps leave clues: • Point 1 - Location • Point 2 - Short term pattern • Point 3 - Long term pattern • Point 4 - /weakness • Point 5 - Volume • Point 6 - Void

PAGE 2 Mastery Series Significant Gaps

Point 1 - Location • Gaps just above an area of old supply/new demand (pivot point) on daily chart • Should be less than 8-10% from pivot point • Check multiple time frames • Identify relevant supply/demand areas

PAGE 3 Mastery Series Significant Gaps

Point 2 - Short Term PatternA Bollinger squeeze • Did the following short term setup occur: ✓Yesterday was a wide range bar (WRB) ✓There are no long upper or lower shadows ✓Higher than normal volume (trap) [OR] ✓Last 5 days were in a base/consolidation • Consult Multiple time frames for guidance

PAGE 4 Mastery Series Significant Gaps

Point 3 - Long Term Pattern • The daily chart is in a trend but today’s gap reversed or ended the trend • Daily chart is in uptrend (not extended) or was in a consolidation or base and today’s gap opens over the base [OR] • Gap is over a daily sell setup on daily chart

PAGE 5 Mastery Series Significant Gaps

Point 4 - Relative Strength/Weakness • Stock is gapping up while market is gapping down (relative strength) • Stock is gapping down while market is gapping up (relative weakness) • Stock is gapping up or down while market is opening flat • Market is gapping down while stock is gapping up (or the reverse)

PAGE 6 Mastery Series Significant Gaps

Point 5 - Volume • Want decent pre-market volume (50,000+) • Want stocks that have average daily volume of 1 million+ • Focus on above average volume

PAGE 7 Mastery Series Significant Gaps

Point 6 - Void • Minimum of 3:1 reward/risk to next area of supply or demand on chart (void) • The bigger the void the better • The profit opportunity is the area from old supply, now new demand, to the next area of supply (the void)

PAGE 8 Mastery Series Significant Gaps

A professional gap can not be: • An American Depository Receipt • An issue that trades 24 hour markets (gld/slv) • Gapping due to a buyout • A stock with a daily chart that is “a mess” • (lots of choppiness, long shadows etc)

PAGE 9 Mastery Series Significant Gaps

Key Factors To Consider • Is there a reasonable spread between the bid and the ask? • Don’t ask “why” - it’s not important. The why of the gap has already been factored in • Gaps remove the need to clutter charts with indicators • Price is only leading factor • By the time a lagging indicator catches the price on a significant gap, the move has already happened • Focus on price and Supply/Demand • You need pre-market data for day trading gaps

PAGE 10 Mastery Series Significant Gaps

How To Find Significant gaps Free Resources • www.nasdaq.com • www.finviz.com • www.thestockmarketwatch.com • Your Trading software: ‣ TradeStation ‣ Think or Swim ‣ Interactive Brokers etc

PAGE 11 Mastery Series Significant Gaps Simple Setup to trade gaps Trading Intra-day Gaps • Identify & mark the demand/supply areas prior to gap day • Identify & market pre-market demand/supply areas • Rate the gap using the 5 simple steps • Look for the wide range bars with increased volume • Make sure the stock fits your trading plan: • Stock price & bid/ask spread • Sufficient 3:1 reward to risk • Pre-plan your trade ideas before the market opens

Pull Back Trade Setup • Quality trade setup - Buy or short @ supply or demand • Focus on top 2-3 best gaps you identified pre-market • Watch for wide range bars to form • Look for a 2-3 bar clean (small wicks) pullback into 40% of wide • Trade at or near reversal times from a 5 or 15 minute charts • Confirm target to next supply area is greater than 3:1 • Hunt for a reversal candle - such as an engulfing or doji • Buy above reversal candle and place stop below reversal candle

PAGE 12 Mastery Series Significant Gaps

PAGE 13 Mastery Series Significant Gaps

PAGE 14