Quite often the open is unusually high or low in relationship to a normal trading range a particular day, so called gaps. One reason might be that the market is overreacted on special news.
There is an old adage saying that “the market abhors a vacuum”, meaning that most gaps (not all) eventually will be filled. In this regards, many traders exploit these gaps in the open to make a quick profit in a short amount of time.
Here’s how you can do it if you have gaps on the upside:
If the stock opens unusually high it is telling you that the buyers are so motivated and they are prepared to pay more for the stock that day than they did throughout yesterday’s trading range.
In this case you’ll enter the market at a point close to the lower part of the gap and place stop-loss a safe distance under your entry position.
Here’s how you can do it if you have gaps on the downside:
If the stock is open unusually low, it is telling you that the sellers are so fearful and they are willing to liquidate at prices well below yesterday’s trading range.
In this case you’ll enter the market at a point close to the start of the gap and place stop-loss a safe distance over your entry position.
Such positioning as pointed above is often low risk because you soon find out whether you are right or not. If you are wrong, the market will tell you by moving quickly beyond the gap areas. So, exploit the gaps in the open can often be a great way to make money day trading.