Why do most traders love trading gaps? Because they are Stocks In Play, in the news, with increase interest and volume. So they provide with big moves and big profit potential.
But what happens when you miss your 2, 5 or 15 minute entry? Should you just forget about that stock and focus your attention to something else?
My advice is keeping a chart of the gaping issues (those with good set-ups) that fit your strategies and just wait for a good risk reward entry.
Above is the chart of CHK (Chesapeake); we studied it pre-market. We were not convinced on the “bullishness” of the up move – coming from 25.50 area big move up plus the Daily chart is still in a downtrend. Under all moving averages.
We identified our ACTION area at previous resistance in the 29.50 ZONE.
The stock made a nice opening run into that zone - but we didn’t feel like it was a high odds short. So we decided to wait until we traded under the low for the session. (28.60 ZONE).
That area presented us with another challenge. It was just 10 cents off support. (based on previous week action. We can tell from the chart that both days when the stock traded under 28.50 a big drop followed. So, now we had an idea we can test and try to capitalize on.
Our short triggered around 1:05 EST. after we broke the low of the day. The stop was 15 cents and the initial target was 28.00 ZONE for a 3R move. (We trailed out the position at 27.88) but it continued to target 2 at the 27.50 area.
NOTE: Even when we "missed" the first short at resistance the Stock gave us a nice trade were we made 4Rs (or four times the $$ amount risked).
NOTE2: The stock gave yet another entry later on with a 12c stop once it traded under 28.00 for another pretty decent trade.
So - Keep those gappers in your radar!!! They will likely be in play the whole session!!
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