Trading a “Gap and Run” strategy is one of the most powerful day trading strategies a professional trader can implement.
If done right it can be so effective that you can finish your day after 30-60 minutes of trading!
And with this short and simple strategy you can return massive returns FAST!
It starts with strict discipline!
Sure, every now and then you might get lucky and pick the right stock and the right direction, but that’s gambling not trading!
Finding the right stocks each and every day takes grit as you hunt the markets scouring for that perfect trade.
Every day I search for the same setup and never take a shortcut with my research.
Repetition is what makes us so good at these strategies and it is discipline that keeps us profitable.
Learning a strategy for day trading gaps consistently is critical for success in the markets.
In this tutorial, you will learn how to identify, interpret, and trade the Gap and Go pattern the right way to lock in massive 70% gains in a single day!
The Gap and Run strategy has 2 key parts…the Gap and the Run.
What does the Gap and Run strategy break down to?
An overnight gap measures the difference between yesterday’s market closing price and today’s opening price.
Unlike other strategies being early is a plus in this strategy.
This will allow you to be thoroughly prepared once the official market open arrives.
Some of the most popular scanning logic includes today’s pre-market stock prices but does not include yesterday’s after-market stock prices. Be sure to understand how your broker calculates the gap to avoid confusion.
After the gap is identified and the market opens it’s a mad rush as traders are now piling into their favorite stocks pushing it higher.
Because volatility is higher than average it is important to monitor prices closely as the run could happen in the moment you blink.
Pro tip: It’s best to use mental stops here instead of physical stops to keep you from losing your position in the high volatility.
This is an advanced technique and puts the trader at higher risk of significant losses.
Pros/Cons of a Gap and Run strategy
Many strategies that traders utilize in the marketplace require continued practice and constant trading in order to master the techniques to become profitable.
Like every trading strategy… the Gap and Run has its advantages and disadvantages.
Remember, there is no “holy grail” strategy that works 100% of the time.
Advantages of a Gap and Run strategy
- Easy to identify the setup
- Easily adaptable to other patterns, ie) breakout or momentum patterns
- Many brokerages include standard scanners to find gaps
- Long and short trades possible
- Perfect for day trading the market open
- Quick and large profits are possible
Disadvantages of a Gap and Run strategy
- Massive gaps can lead to high volatility and high bid/ask spreads
- Can’t trade gap “blindly”, it requires research to understand the reason for the gap
- Can’t use market orders to buy or sell for risk of bad fills during high volatility
Sound like something you want to trade yet?
Let’s take a look at a live trade that landed a whopping 70% returns!
Trade Gaps Using Options
Now this is where things really get interesting.
Trading stocks don’t let you have explosive gains like trading options would.
So, let’s see what happens when we combine a stock trading strategy and trade options on it instead.
This will break down into 4 steps for this trade:
- Risk management
1: The Setup
So this is what I spotted that led up to this trade.
The SPY’s on 1/15/2019… there was significant buying and increased volume at the end of day.
And this caught my eye!
Take note of the highlighted portions of the chart near the open and close.
The volume at the end of the day was significantly larger than the volume at the beginning of the day.
This signaled a potential for a strong post market leading into a strong pre market and a gap to form.
Which is exactly what happened!
Next… In the overnight hours a Bull Flag was spotted forming in the SPY’s.
This is a great bullish continuation signal and also helps give a support level for which the SPY’s should hold at.
2: The Entry
On a 15 minute chart in the premarket trading, the 10 EMA line is above the 20 EMA line.
When a shorter term EMA is above a longer term EMA, it signals to the trader significant strength in the stock.
For a trader this is a sign that the stock has a high likelihood to continue with the strong trend.
The Trading Plan:
A trader has many different ways to place a trade on a stock, typically choosing between stocks and options.
In this case – options are close to expiration and we expect the movement to be sudden. So it makes the most sense to leverage the options market.
Here was the trading plan issued to the trading team was:
“Trade of The Day is SPY January 21 330 Calls @ 0.90
Buy to open followed by sell to close CALL option move
Target price: $0.99 or hold until close.” – Ben at 9:41am
3: Risk Management
If the overnight support formed by the Bull Flag is breached, it is recommended to exit the trade.
In order to remain in this trade the SPY must remain trading above the technical support level of 329.35 set by the Bull Flag in the pre-market.
If the SPY’s break through resistance it is best to hold all calls until EOD to ride the run.
Additional technical resistance levels: 329.51, 329.65, 329.73.
Additional technical support levels: 329.35, 329.15, 329.06.
If the SPY’s break 329.35 that is a breach of the technical support level and should be the stop exit level for this trade.
For this trade the exit is fairly straightforward.
Looking at the resistance that was breached early in the trading day and price holding strength above the support, it seems that it’s best to hold the stock until the close.
So… Overall, this trade went exactly as planned!
One thing that could have been done differently was to trade the stock at the close the day prior but that’s monday morning quarterbacking the trade.
Let’s break down the trade by looking at the stock charts.
In this chart, the bottom of the Bull Flag is the stop level on this trade.
Since we are looking for continuation to the upside, a break of this level signals a failed pattern and therefore, invalidates the trade.
With trying to get the best bang on this trade the options were traded.
Now looking at the price of the options.
The options were on fire from the close of day prior.
It would have paid off big if we took the trade at the close of the prior day.
But that’s ok since this trading strategy allows us to get in after the gap.
In this trade we were able to enter at $0.90 and adhering to the trading plan, we were able to exit this trade at the end of day at $1.52!
That’s a massive 70% in a single day on those options!
The Gap and Run strategy – the name explains it all.
By following the simple strategy outlined above, you won’t be left out of the action again! There is no reason you can’t bring in huge gains even after the market gaps higher.
Finding the right stocks each and every day takes grit as you hunt the markets looking for that perfect trade.
Every day I search for the same setup and never take a shortcut with my research, and neither should you!
It’s important to remember that repetition is what makes us so good at these strategies…and it is discipline that keeps us profitable.