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Gap Trading Stocks Online

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Gaps in stock trading are breaks in the prices of given securities that can result from a number of factors. Following is information about gaps, and how online investors at sites like Robinhood, E-Trade, and TD Ameritrade, and others can take advantage of them to buy and sell for profit.

Gap in Stock Exchange

A gap is a break in price that occurs when a security’s value moves up or down quickly, surging or plummeting in price. Gap days are what online investors can look to for help pinpointing trends, or at least potential trends in a security.

Example of Gap in Stock Trading

If security XY trades between $35 and, say, $36.30 one day (the low and high of the day), and opens the next day at above the high for the day before (valued at at least $36.31) and never falls below that the second day, an up gap results. This type of gap happens when the low of one day is higher than the high of the previous day, indicating no intersection in price between the two days.

If security XY trades between $35 and $36.30 one day, and opens the next day at below the low of the previous day (at $34.99 or lower), and never reaches the low of the previous day, a down gap day results. This type of gap occurs when the high of the gap day is lower than the low of the previous trading day, indicating no overlap in price between the two days for a security.

Trends and Gaps in Stock Trading

Gaps can often, but are never guaranteed to, indicate trends. An up gap day can designate a stock’s rising in the coming days, and a down gap day can alert of its continued falling to come, but they do not always predict a security’s future. There are, however, some ways to better know if an upward or downward trend suggested by a gap day is actually likely, and this involves close monitoring of the stock after a gap day.

If a stock opens at or above the value of its high the day after an up gap day, likely it is actually trending upward. This would be a time to consider a buy, on this third day, the day after a security’s up gap day. If the stock rises throughout the day, consider a sell before the close of the buy day, or, at very latest, the next day, as a few days on the rise cannot protect a security from plummeting after that. If buying shares, limit risk by utilizing safety orders.

The same goes for a downward trend. Try a stop loss order to sell a security that is falling still after a down gap day. Although it can turn around, look to the stock’s moving average over recent months, or even over the last year; if it is not significantly down, it may continue falling. If it is down, consider that it may turn around and rise again, making a sell unnecessary.

To find gap day, simply compare the highs and lows of the most recent trading day with the highs and lows of the previous day. If there is not price overlap, then the most recent day was a gap day.

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