Gap and Go Strategy: Here’s How to Go About It

The Gap and Go is one of the most consistent day trading strategies for active investors. While there are other gap trading strategies, this one is arguably the most profitable. 

The basic idea behind the gap and go strategy is to identify stocks that “gap up” or “gap down” on high volume, then enter a position as soon as the price breaks above or below the opening range. Ultimately, you want to ride momentum in the direction of the trend.

Gaps occur when there are significant changes in supply and demand for a security overnight — resulting in a large price change between yesterday’s close and today’s open.

In this article, we are going to cover everything you need to know about the Gap and Go Strategy so that you can make the most out of it. Keep it here for that.

How to Trade Gap and Go

A gap and go trade is a momentum based strategy that utilizes a stock's tendency to gap up or down after earnings. The idea behind the strategy is that stocks that gap will continue to trend in the direction of the gap.

For example, if a stock gaps up with strong volume, it may continue higher throughout the day. Some traders also like to use this strategy for stocks that gap up on news such as analyst upgrades or an acquisition announcement.

The key to this strategy is having a pre-market routine that identifies these stocks ahead of time so you can be ready for the opportunity when it presents itself. There are a few ways you can identify potential gap and go stocks but one of the best ways is by using the power of pre-market volatility.

The gap and go strategy is one of the most popular strategies for day traders, as it allows for fast movement in and out of the market. However, this strategy does not work for all day traders, as it requires a set of skills that are not possessed by all day traders.

This is where pre-market scanners like Trade Ideas Pro come in.

What is the Importance of Pre-market Scanners in the Gap and Go Strategy?

Understanding what is happening in pre-market is key for trading the gap and go strategy.

The gap and go strategy is a relatively simple day trading strategy that involves scanning for stocks during the premarket with a gain above average volume and a positive catalyst, then watching the market open to see if they gap up (or down) to continue the trend.

We highly recommend the Trade Ideas pro premarket scanner to locate potential stocks for this strategy, as it can be challenging to find these high probability setups on your own. Using Trade Ideas can save you many hours of research and help you find these opportunities quickly.

Essentially, the Gap and Go! Trading Strategy is an attempt to capture stocks that have a tendency to move strongly in one direction (either up or down) out of the gate each morning, and take advantage of this strong directional movement, while also attempting to avoid getting caught in stocks that just “gap” and do absolutely nothing else.

How to Use the Gap Scanner on Trade Ideas Pro

Step 1: Ensure that you have an active Trade Ideas Pro subscription. This tool makes it really easy to pick the ideal setups for optimal returns.

Step 2: Launch your Trade Ideas Pro software and log-in.

Step 3: Lookout for an icon with the words “ON Trade The Gap”…yup, that’s the gap channel…open it.

Step 4: You can now freely use the tool and even configure some extra columns just as you’d like. Talking about columns we’re referring to Gap $, Gap %, Price etc.

Step 5: That’s it! Your Trade Ideas Gap and Go premarket scanner should be ready in less than a minute.

Benefits of the Gap and Go Strategy

Here are some of the benefits you get to enjoy when you trade using the Gap and Go strategy.

1. It is a strategy that works in any market conditions

The gap and go trading strategy works in any market conditions, whether it's bullish or bearish. You can use this strategy on stocks that have gaps up or gaps down. The key is to find stocks with strong momentum on the daily chart, then use these support/resistance levels to enter your trade at the right price.

2. The risk/reward ratio is excellent

The risk/reward ratio of the gap and go strategy is excellent. With a small stop loss, you are risking very little money to make much more. This is what makes the strategy so profitable in the long term.

The gap and go trading strategy allows you to profit even if you are wrong

Even if you get into a trade only to find out that it was not a gap or it was an exhaustion gap, there's no need to panic. Because this setup can be used for both gaps and exhaustion gaps (remember to switch your indicators), sometimes you may still be able to make some money out of it.

If you enter into a trade where price goes down instead of up, it's not a problem because the strategy has its stop loss in place. If it goes against and touches a stop loss, then then that loss and is taken and you can move on to your next trade.

3. The strategy can be executed with low capital

The strategy can be executed with low capital. If you trade using the pattern day trader rule, then you need $25,000 to trade in the US stock market. This makes it difficult for many traders who are just starting out in their trading careers. 

With the gap and go strategy, you don’t need nearly as much cash. This can make it perfect for swing traders or day traders who have less capital to work with but want to grow their accounts quickly.

4. There are many opportunities every day to trade

The gap and go strategy is perfect for those who want to be active in the market every day. There are many opportunities every day to trade, as long as you know what you’re looking for and where to find it.

The beauty of this strategy is that it can be used on any time frame, from the one-minute charts to daily charts. It’s a great way to get a feel for how the market works and how to make money from it.

5. You can trade multiple stocks simultaneously

By using this strategy, you can trade multiple stocks at once as long as they meet your criteria. This will allow you to make more money in one day, as well as diversify your risk in case one of your trades doesn’t work out.

6. With a little practice, it is easy to learn

Learning how to trade stocks is as simple as buying low and selling high. Most of the time, stocks will trend up or down for extended periods. The trick, then, is finding an entry point that allows you to buy low and sell high. 

The gap and go strategy does just that. It only requires about 10 minutes of your time each day, and most of that is spent waiting for trades to set up.

7. Fast entries and exits

One of the biggest problems traders face when entering a position is waiting for too long to get in. They wait for confirmation or for more upward momentum before pulling the trigger, but by then their entry point has often passed them by. The gap and go strategy solves this problem because it gives you an entry signal early enough.

Drawbacks

The strategy is not without flaws and here are some that you can expect to come across.

(1) False Breakouts

You may have heard about false breakouts before. The definition of a false breakout is when a stock breaks out of a resistance level or previous high but then reverses back below it within the same trading day. False breakouts are very common in stocks that are in an uptrend or downtrend.

(2) News Release

A lot of times when you place an alert for stocks to watch for the next trading day, you may see some news come out on the stock during pre-market hours or after hours that will cause it to gap up in price.

And this can be a good thing if the news is positive but can also be bad news if the news is negative. You should always read through any news releases before making any decisions on whether to buy or sell a stock at any time during market hours.

Are Gaps Always Filled?

It is important to mention that gaps do not always get filled because they represent an area where no trading took place. There are two reasons for this:

The price doesn't always return exactly to where it gapped from. Sometimes it retains some of its gains/losses, so that it only partially fills the gap.

Sometimes the price just continues in the direction of the gap without filling it at all.

This is why traders need to use stop losses when trading gaps - to protect themselves from downside risk if their gap trading strategy does not work out as planned.