Trading opening gaps is a really popular strategy for new day traders. Gaps are easy to spot—but figuring out what type of gap is occurring can help you figure out if a particular stock has great potential. This blog will explain:
- What opening gaps are
- The types of opening gaps
- What filling the gap means
- How to find opening gaps
What are Opening Gaps?
Opening gaps occur when a stock’s price opens higher than it closed the previous day. There is almost always a catalyst for this, such as overnight news, or company earnings. This could mean that a new trend is about to start or it could be a sign of a reversal.
Gaps are “filled” when the price returns to the price of the stock prior to the gap.
There are four types of gaps:
- Common Gaps
- Breakaway Gaps
- Runaway Gaps
- Exhaustion Gaps
Common Gaps: Normally, there is no major event that occurs before this gap. The gap “fills” quickly, usually a few days, and average volume usually occurs. These occur naturally in the market.
Breakaway Gaps: This gap happens when the price gaps above the support/resistance lines. This may come after another type of chart pattern. Increased volume usually occurs, and can be a sign of a new trend.
Runaway Gaps: This gap occurs when “trading activity skips sequential price points,” according to Investopedia. It happens in the middle of a pattern, signaling that it is likely a large amount of buys/sells are occurring. This usually happens when traders didn’t initially get in at the start of the uptrend, or out of the downtrend. More times than not, this happens after a breakaway gap, and may reinforce the current trend.
Exhaustion Gaps: This gap is a signal that occurs after a consistent price increase, followed by a gap down in price. This usually signals lower demand and a signal to the end of an upward trend.
Gaps are easy to spot—but the harder part is determining what type of gap it is. Take care in identifying what type of gap occurred, because that can factor into whether or not you make or exit a trade.
Filling the Gap
When a gap is filled, that means the price is back to the original level before the gap occurred. A filled gap is common, and can occur in the same day, or take a little longer. Gaps are usually filled due to technical resistance, price patterns, or a correction.
A Simple Strategy for Trading Opening Gaps: The Gap and Go Strategy
The gap and go strategy is one of the most popular day trading strategies for beginners. The reason why many beginner traders use this strategy is that it’s easily identifiable and is perfect for day trading the market open, which as a beginner, is most likely the time of day you’re trading.
The first thing you’re going to want to do is to monitor what’s going on during pre-market hours to determine where prices are going.
The goal here is to trade right as the market opens or during the market open. The gap you’re looking for is defined by the first tick during regular trading hours in relation to the last tick of the previous trading day within the regular market hours. You’re looking for the continuation of momentum gained overnight.
When you see a gap up you want to buy the stock. When you see a gap down you want to sell the stock.
The most important thing to note when using this strategy is understanding why the stock is gapping up or down. The way to do so is to look at one of the biggest catalysts in the stock market: the news. Before considering whether or not to buy or sell the stock determine if the news that caused the stock to move has enough power to continue the momentum.
How to Find Opening Gaps in Benzinga Pro
Finding opening gaps in Benzinga Pro is extremely easy. First, open up a new workspace. You’ll want to open up Movers, Signals, and Screener. Note, the order you click on the tools is the order they’ll show up in the workspace.
Here’s how to set up each tool:
- Choose gainers, losers or both. If you’re looking for upward gaps, choose gainers. If you’re looking for downward gaps, choose losers. It depends on your trading strategy, and if you’re interested in shorting stocks.
- Select Pre-Market Session. With Movers, it is important to make sure you have the right session selected. Once the market opens, switch it over to Regular.
- Select Sessions for the period. Session will show you how big the gap is overall, instead of a shorter time frame.
- If you care about price and market cap, choose how you’d like to filter those categories.
When using the Signals tool to find opening gaps, first select the price spike and opening gaps Signals. At the market open, you’ll be able to see all the stocks with opening gaps. After the market opens, you’ll get price spike alerts.
You can also set up desktop alerts, sound and/or synthesized voice notifications.
To set up your screener, you’ll want to adjust the filters that show the results. You’ll want to make sure you have the following categories:
- % Change
- % Gap
- % Change From Open
- Relative Volume
- Average Volume 10 day, 30 day, 60 day and 90 day
If not all of those are showing in the results section, you can click the column tab on the right side of the tool to adjust.
From here, you can sort depending on how you trade. For example, filtering from % change from open, so you only see what movement happened from the opening bell, not the pre-market session. Most of the results are going to be day trading opportunities, though you may find some that could make a short swing trade.
If you haven’t yet, start your free, two week trial of Benzinga Pro to find opening gaps.
Trading opening gaps can be a great strategy for beginners. It’s easy to spot, especially with tools, but before you make a trade, you need to analyze what kind of gap it is and if there are any news catalysts related to the gap.
Disclaimer: Benzinga is a news organization and does not provide financial advice and does not issue stock recommendations or offers to buy stock or sell any security. Benzinga Pro is for informational purposes and should not be viewed as recommendations. Benzinga Pro will never tell you whether to buy or sell a stock. It will only inform your trading decisions. You can find our full disclaimer located here.