Heres a profitable way to trade gap-ups!
We bring to you a profitable way to treat gap-ups so that you can implement them in your trading style to generate profits!
During these volatile scenarios in the global markets, it is always difficult to make profits during gap-ups and gap-downs. Most of the action is factored in during huge gap-ups and thus, considerable gains are off-table for the traders. This is a big disadvantage for the traders as they miss out on cashing their pockets. However, we bring to you a profitable way to treat gap-ups so that you can implement them in your trading style to generate profits!
This trading system consists of four points that can make the trade profitable:
- Strong gap-up: A breakaway gap should be preceded by a validating basing pattern for at least three weeks. The longer the consolidation, the more powerful the setup will be!
- Focus on volume: Volume is one of the most important factors in any trade. For this setup, the volume must be at least 100-200 per cent greater than the average volume. This ensures strong buying strength and good liquidity.
- Distinctive gap-up: The gap-up must be strong, at least 2-3 per cent above the breakout level of the pattern or resistance zone.
- Observe the closing: The closing price during the gap-up day is the most crucial for this set-up. It should be higher than the opening price and must form a strong bullish candle on the technical chart. Swing traders can wait till the end of the day to see if the stock sustains the gap-up and trades higher or not.
Now that you are acquainted with the setup, let us bring forward to you one such profitable trade!
Here’s a chart of RHI Magnesita India.
The stock made a strong gap-up on Friday i.e. February 11, 2022. On analysing this chart, we found out that the stock is consolidating in a broader range of Rs 404-Rs 464 for 21 trading sessions or 30 days. Also, the volumes were quite low, and not much enthusiasm was witnessed during this period. However, a strong gap on February 11, 2022, above the consolidating pattern, paved the way to the start of the successful trade.
Initially on Friday, the stock fell slightly lower, owing to some profit booking. However, strong buying lifted the stock above its opening price. This can also be the point for initial buying in the stock. Throughout that day, the stock remained strong and closed significantly higher. If you observe, the volume was tremendously higher on the day of the gap-up. Also, the stock jumped about 14.35 per cent and closed nearly 4.5 per cent above its breakout level. At closing, swing traders can initiate their buying.
So what happened next? The stock remained bullish for five consecutive days and surged about 15 per cent. Conservative traders can exit their positions when the stock formed a Doji candle and momentum was seen to fizzle out. When all the above pointers were ticked, the trade proved to be a successful one. Besides, 15 per cent in just five trading sessions is not bad, right?!
The above points are to be keenly observed while carrying out such trades. This will have higher chances of the trade being successful. We, at DSIJ, bring such useful content and information to our clients and subscribers. We provide daily calls and recommendations, which are intraday-based, positional & long-term. You can be a part of the DSIJ family by subscribing to our products, magazines, or services!