Gap trading is a strategy where we let stocks come into price levels we’re willing to buy or sell which keeps us from forcing trades. Trading on our terms.
We keep our gap fill list that helps to identify stocks that are close to price levels primed for a trade.
There’s a difference between searching for trades and playing a little mental masturbation while trying to convince ourselves of a possible trade setup that doesn’t exist. (sound familiar anyone?)
Trading is never a binary process. Trading, and more specifically gap trading is part science, and part art form.
There are two types of gap fill trades. Long and short trades.
Here is one example of where the human factor and decision making becomes paramount.
It’s lunch time, the market is up, in bull mode and the volume is extremely light. You see one of the stocks on your list headed higher, and approaching its gap fill territory.
Decision: DON’T SHORT IT!
While the trade may work out and that price might even be the top for the day, your odds or probabilities for success are not the same as other points throughout the trading day.
The best time of day to short anything in the market is during the first or last 90 minutes of the session. Around mid day, the market volume tends to be light with less selling pressure, making a short trade less desirable.
Obviously there are exceptions to this rule, but in order to keep the odds tilted as much as you can in your favor, look for stocks that are trading down into gap fills during the slow portion of the trading day.
Trading is a business and has to be treated as such. Have a process, policies and a strategy to operate within.