The look of opportunity usually comes in the form of gaps and breakouts/breakdowns for me. Gaps are a phenomenal opportunity to capitalize on a shock to the price action that is unexpected to those already holding it. My favorite play is a gap down after multiple days of a sell off, as this is typically novice in nature. This is usually when professionals will step into the oversold position and “right the ship”. Buying the washout is by far my best strategy and highest odd strategy. How much it will retrace is dependent upon how deep and where nearby support exists. Volume will often be climactic as traders head for the exit in defeat.
Key Gap Thoughts
Gap can deliver price resistance and support-they can abruptly change a stocks direction when rallies or declines that move into their area.
- Upside gaps that occur after multiple days down are often professional in nature and should signal an opportunity to look for areas of support to buy.
- Upside gaps that occur after several up bars are typically driven by market novices and should signal an opportunity to look for areas of resistance to short.
- Downside gaps that occur after several up bars are typically professional in nature and should be looked at as potential selling opportunities.
- Downside gaps that occur after multiple days down are typically novice driven and should be looked at as potential buying opportunities.
I will easily admit that my success rate at breakouts and breakdowns are not as high as buying washouts but they can be just as powerful, particularly if the price action is at an key high or low point for the stock. What I am working on is starting smaller and letting it prove itself to me before adding into it. It is challenging, particularly when you see a tight risk however my personal experience is that I get chewed up enough by being wrong or watching it slip and shoot into the opposite direction and giving me a much larger loser than I wanted. So, after touching a hot stove enough damn times, I am learning to just start small. Small is relative, the more you experience different plays, the more your definition of small will change in a positive direction for decent gains.