Posted by forex at 8:50 AM
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1. Identify a tradable gap. Closely follow the price movement of a stock (or several stocks) for weeks or months until you understand the trading patterns and can identify a pattern, or an unexplained price spike occurs, that you feel is a legitimate gap.
2. Buy or sell the stock based on the direction of the gap. For example, if a stock trading at $20 gapped down to $17 on no news, you expect it to go up so you buy shares. If a stock gapped up from $20 to $23, you might consider selling any stock you own and buying it back cheaper after the gap is filled (or taking a short position in the stock).
3. Complete your trade by buying or selling when the gap is filled. The amount of time it takes to fill a gap varies dramatically, from just a day or two to many months. And remember, not all gaps get filled. If the gap down or up occurred due to a significant change in business circumstances (good or bad), then the stock may never return to its previous price levels.