Wednesday, January 12, 2011

An example of how to trade gap ups

I hate chasing gap ups. On the contrary, I like selling into them. But there are instances in which I don't mind entering into gap ups. I had written a series of 3 posts last year on how to trade gap ups. Today, I traded a stock that fitted all the criteria I had underlined in that post, so I thought  I would share it with you readers.

I had posted about ELX on twitter in pre market, saying that I was looking for a break of 12.25. The chart was coming off a very impressive consolidation pattern and 12.25 was the key resistance level. The stock had seen impressive volume come in the day before. When the bid jumped to 12.25 in the pre market, I knew this stock could be in play today. As stated in the post on trading gap ups, I give a lot of importance to the pre market action if I plan to trade gap ups. When the stock started off well and did not fall below 12.25, I did not hesitate to take a position. In my experience, if the stock gaps up above a key resistance level, especially with volume, chances are that the stock will continue up, at least in the short term.

Agreed the gap up wasn't huge, but I have found in the past that the same strategy works just fine, irrespective of the size of the gap up. Of course, be very particular about your stops in chasing gap ups as a reversal can also be a very strong technical signal and quite possibly start of a correction.

Take care and good luck!


Anonymous said...

With a protective SL just below the gap, I suppose?

positiontrader said...

That should do the trick. But I would recommend giving it a little room below the gap as in this age of automated trading, you will often find the stock spike down before resuming the trend up.

Stewie said...


positiontrader said...

Thanks Stewie! Its nice to be appreciated by one of the best!