What is the single biggest reason why most traders fail?
Before we answer, let’s gain a complete understanding of what Gap Trading really is. You’ll get the point, stay with me.
Depending on the amount of books you’ve read, and the number of stock market related website you’ve visited – we can make a pretty good argument there are several different methods or at least interpretations to trading the gaps. They all get fancy names like:
In any type of trading, specifically day trading, we have to focus on the most important reason we’re here – Money & Profits. The fancy names, expensive books nor half based websites are going to put money in your pocket.
What is going to put money in your pocket is having an extremely well defined, yet simple strategy that is consistent and repeatable.
Gap Trading can be one of these strategies, but only if you fully understand what works the best, why, and how often it works.
The strategy that offers the most consistency, highest winning percentage and best of all, a simple yet effective set of rules any trader can follow each and every day is “trading the morning gaps.”
What makes the Morning Gaps stand out?
The predictability of the Smart Money.
Huh? What in the world does that mean?
The smart money represents hedge funds, mutual funds, investment banks, pension funds, and others. There will always be a number (price) that some of these players are going to be compelled to either step in and support a stocks that is falling, or dump a lot of shares when the stock is rising fast and out of character.
They say a picture is worth a thousand words. Let’s find out.
Below is a chart of a stock that was gaping down at the opening bell. Monster Beverage reporting earnings and the market punished the stock. The first reaction of most people is to run for the hills when they see a stock down this hard. The first reaction of a trader who understands this form of gap trading is “fantastic, let’s find the support level.”
There are two primary reasons we can have confidence in our ability to find the specific area where a stock will have a price reaction in the other direction.
- Nothing moves in a straight line forever
- About 75% of the time we can identify a very specific price where the “smart money” will step in and make a big move.
Knowing where the institutional traders and investors will likely step in to support a stock, or show up to sell a stock is the holy grail. All we’re trying to do is identify the right area, hop on board and let the big boys take us for a quick ride while we rack up profits along the way.
You see, too many traders enter a position under false pretenses. They will justify the reason to enter the trade based on some piece of information that has historical value to them because they’ve seen it work before. We’ve all done that, let’s not kid ourselves.
At least you get a complimentary drink in a casino
One of the lessons right from the “school of hard knocks” is knowing the difference between gambling and trading.
“I think a stock is going to go up from here because it’s oversold” is one of the worst reason for a day trader to ever consider.
“The stock should bounce from here because this is the price level we calculated where the institutions should step in to support the stock” is the reason to take a Morning Gap Trade.
The video below has opened up the eyes of many traders to what is possible trading the gaps. If you’re the least bit intrigued by what trading the gaps has to offer, then it’s worth a few minutes of your time to dig in a little further.
By now, you might begin to realize it’s all about having a systematic approach to trading
The single biggest reason why people fail while trying to day trade is by letting their emotions dictate the outcome of a trade.
The best way to eliminate our emotions is to implement a process and systematic approach to trading. Gap Trading offers one such methodology that qualifies.
What Gap Trading brings to the table for traders:
- The ability to identify a specific price where you’re willing to buy or sell a stock
- A specific and defined stop loss and profit target
- Hard and fast rules on how to calculate the institutional support and resistance levels.
- The stocks that qualify to be traded under this strategy?
Once you turn trading into a series of if / then statements, you’ll see that the decisions that need to be made are extremely binary. Trading involvs one of your most precious emotions – the one tied to money. Let’s take ourselves out of the equation – as much as we can.
You’re welcome to check out dozens of trading examples found on our YouTube channel.