The Gap Stock Trading Technique

My trading style consist of one search everyday after the markets are closed. I do a search of stocks that increased a minimum of 500% + above the average trading volume. From there I only look at the ones that were positive for the day. Then I check the charts of these stocks to see if they gapped up for the day. The gap up has to be bascially an all time high or a few years all time high. It is better if there is a base prior to these gaps. If it is uptrending that is ok. Then I check the news once I narrowed it down to see if there was postive related news. There must be positive related news. The news must be better than expected, highest quarterly earnings, or anything similar. That is it in a nutshell folks. Usually, I start the day with about 50-70 stocks. Then it is narrowed down to 30 or so. Finally, after reviewing the charts I get anything from 0-4 that made the cut. Most days I recieve 0, which is fine because on the days I find something it is all good.


Buying and Holding:

If there is one I like and would buy; I try to put an order in for the next day. How long do I hold these stocks when I buy. I hold for a little as 5 weeks, but I'm seeing better returns in about 10 weeks. Once in a stock I watch it to see if it can hold a 10 DMA line. I won't sell unless it goes below the 50 DMA or if it goes down to fill the gap. Even if it is at the 50 DMA and I have some gain I'll hold till I find the next stock I think will be a winner.

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My Trading Technique

Although there are many different trading styles and techniques that have been used to great effect by many different ( sometimes very rich) traders, it is not really a good idea to keep on trying out different techniques for different stocks and just hope that "if it worked for them, it will work for me". To make a system successful you need to know what you are doing. I do not mean that you need to understand it as it is written by the person that is giving you the information. I could easily red Bill Gates's story about how he had an idea and thought that it would work. I could follow every step that he did and make all of the same decisions, but would I make the same kind of profit that he has? I think that (although it is a nice idea), I would be lucky to break even. But why can I not replicate his success? Because the market conditions are different and what will work has changed.

But even in the financial markets, just because someone has had success with a system, that does not mean that the same system will make you the same money. Although it sounds as though this should be possible, the facts do not bear it out. If it was this easy then everyone that read Warren Buffets book and applied it in the way that he does, would make the same amount of money. The reason that they do not is not the fault of the system, but of the choices that people make when they use the system and their reaction to the conditions that are prevailing in the market at the time. Most of the well known trading systems are well tried and work well. That is the reason that they are well known. After all if they did not work then no one would bother with them. But it does show you that there are many ways (with apologies to those of you with pets!), to skin a cat. The reason that different traders are successful with different systems is because they have learned how to make a system work for them.

The trading system that I use is not complicated and if you learn it well and how you can use it in reaction to market changes, then you can use it to make a great deal of money. It is a very simple system and because of that, there is less room for error. But you still need to get to know it and how it works, so that you are able to read the markets with these tools so you make the right choices.

The system uses a search of the days trading as it's basis. Each day you need to make a search of the days trading and the stocks that have had the best increases. You need to do this after that market are closed so that you get a consistency of results that are not affected by the trading that happens after you have looked the stocks, when you are still researching others. So wait until the markets are closed and then start your research and then all of your results will be consistent.

You need to do a search for stocks that grained at least 500% above the average trading volume of the rest of the market. Do not look at the stocks that were just under this or were close to it. Just look at the stocks that were 500% above the trading volume average. This will mean that you can get a good consistent result that you can analyze. From the stocks that you find, just look at the ones that were positive for that day. Make sure that you follow this carefully. If there is a stock that looks good, but does not fulfill this criteria then do not do not use it. If you are going to follow a system, then you need to follow it properly to make sure that it works and that you are not changing it by adding things that may affect the final answer.

You also need to check the variables to see if they gapped up for the day. You make sure that this is not just a one day thing you need to check that this is an all time high. This will make sure that you are on the right track. Even if it is not then you might still be able to use it but you need to make sure that it is a definitive movement and is not just a market shift that will get set back the next day. You need to make sure that the move is fundamental. If it is not an all time high then you should make sure that it is the best that it has been for a few years. You need to make sure that the move is positive, so it is much better for these purposes if there is actually a good base to the stock before any of these gaps occurred. And if the turn is upward, then that is also a good indicator.

Next you need to do some research to make sure that the result that you have found is actually real and that there is a good basis for the change in the values and that the are not going to suddenly drop. The best way to do this is by checking the news about the stock. This is a good way to find out if there is a reason for the move and to work out if it is likely to continue the trend or not. You need to find some positive news about the stock to justify the price, so that you know that it is not just a blip. You need to find something that is positive, such as better than expected earnings. Any good news that might mean that the price rise is consistent with an actual increase in the real, or perceived, value of the stock.

That is really the basis of this system of trading. It is simple to learn, but very effective as there are few things that even a beginner can get wrong. The trick is to learn the best places that you can do your research accurately. If you find a stock that fulfill the criteria on the figures but is not bourne out by the news then leave it. There is always another that will. Usually The day begins with around 50-70m stocks, but as you begin to use the system you will find that this is reduced to around 30 or so. When you review the charts and make all of the decisions dispassionately and based on the system, you usually end up with nothing.

This is not a problem if you are not left with anything at all. You are not doing this to buy for the sake of it and if there is no stocks that are suitable then you need to wait until there are. Do not think of it as a lack of profit, think of it as a good way of avoiding loss. And when you do find a potential profit maker, then you will know that there is a good reason to buy and that you are very likely to make a profit.

When find something that is good, then you should try to buy as soon as you are able to. If it is possible, then you should try to put in an order for it the very next day so that you do not miss out on any profit. When you buy you need to make sure that you only keep them for as long as it is profitable to do so. Very often you can hold on to them for as little as 5 weeks. But very often it is better you take a bit longer than this to make sure that you get the most from it. Do not try to go for the quick profit when, by delaying a bit, you might make a lot more. Very often you need around 10 weeks to make sure of a good profit.

A good indicator of this is if the stocks able to keep a 10 DMA line. It is not usually a good idea to sell unless it goes below a 50 DMA line. But if it reduces to fill the gap then that may be good. But even if the stock is at 50 DMA and there is already some profit in it, then it might be a good idea to keep it until you find the next stock that looks profitable according to the system.

This system is a very simple way to find the best profitable stocks and to make sure you avoid the potential loss makers. But if you decide to use this system then you need to make sure that you follow it well and do not allow you own opinions to cloud your view of what are the best stocks to buy. That way you will be more likely to make a good, consistent profit.

By: John Smith