3 Ways to Trade the Gap

Gaps can be maddening.

What can you do when a market opens up significantly higher or lower than where it closed? This riddle haunts traders, but there is a solution that could help you succeed.

The interconnectedness of global markets puts money in motion night and day, and overnight moves are now extremely common. It has become a rare occurrence for the stock market to be unchanged when the bell rings.

Patience is an investor’s greatest asset, especially when opportunities come and go, fast and frequently, and another day is just hours away.

Gap openings can disrupt both leverage and risk for traders that get caught in the emotion of the first few minutes of the trading session.

So what should you do on the market gap open?

  1. Wait one hour. Monitor the market in that “amateur hour” with your hands down and away from the computer mouse and mobile device. Let the fear and greed play out amongst the market chasers who are more worried about missing out than making sound and logical decisions.
  1. After that hour is up, analyze the market action. If new higher highs or lower lows are made after the open, the move could extend itself. Be cautious as the trend is already extended. Use the average trading range as a guide to measure more momentum potential.
  2. Look for the price gap to be filled. With a large opening hour, moving the risk reward may favor a price reversal to close that gap. The average trading range can give guidance that a market may have moved too far, too fast.

The worst-case scenario is to do nothing. If the risk reward is not favorable, then it may not be worth it to participate.

How much more upside is there to stocks opening 2% higher?

It costs nothing to sit tight…

Keep it In the Money,

Alan Knuckman

Alan Knuckman
Editor, In-The-Money

Trading Tip of the Day: Earnings Season is Coming…

Greg Guenthner

Another earnings season is upon us…

Every earnings season, I get the same question from traders: The earnings were strong! My company beat expectations! But shares are down – what happened?!?

Yes, it’s that time of year again. Earnings reports will soon dominate the financial news as countless speculators attempt to play the numbers. But every novice trader eventually learns that beating earnings-per-share estimates by a penny or two is not a guarantee that the stock will soar.

You must remember that the market is forward looking. But earnings are simply a snapshot of past performance from the prior three months. When you bet on a stock, you’re betting on its future potential. You’re effectively making a prediction as to how the company will perform in the months and years ahead — not last quarter.

That’s not to say that investors don’t care if a company is exceeding expectations. They do! The market is just much more interested in figuring out if good times will continue.

— Greg Guenthner

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Alan Knuckman

Alan hails from the home of options trading in Chicago, where he began working as a clerk on the floor of the Chicago Board of Trade (CBOT). Beginning with his days on the floor, Alan’s worked with all aspects of the options markets for the past 25+ years.

Transitioning from a clerk to a floor...

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