Share Trading Strategies

STRATEGY #4: Gap Up - Attempt To Fill - BreakOut

This is one of my favorite share trading strategies. I like it, because it's simple and just makes good trading sense.

As this strategy's name implies, you are scanning for a stock that has gapped up and is in the process of attempting to fill the gap. Whether the stock fills the gap of the previous day's high or all the way to the previous day's close or just partially fills the gap, it doesn't matter. All that matters for this strategy is that the stock attempts to fill.

That requires price going below the first 10 min. bar. For this method, I don't like to see the first bar fill the gap. I like to see a more gradual attempt to fill the gap after the first bar, that way the stock has more time to lower it's volatility prior to the breakout. Remember, volatility tends to cycle from high to low to high.

One characteristic I like to look for when considering share trading strategies, is that it some how captures traders in a short squeeze.

When a stock gaps up and makes an effort to close the gap, that means there is a decent supply of traders, that are currently short and that are anticipating the stock to go even lower. When that stock manages to turn around and move back into the range of the first 10 min. bar, some of those traders with a short position are starting to sweat.

They've lost any gains they've had, and most likely are wondering whether or not their stop (possibly above the first 10 min. bar) is going to be hit for a loss.

That's where the breakout comes in. It's generally fast paced and on higher than average volume. The traders that get short squeezed are now stopped out and very often are re-entering with a new long position, fueling the upside breakout even more!

Following are examples of Strategy #4.

Example of share trading strategy #4 on chart of BHI Stock chart of Ford Motor Co.

There is another variation of this trading strategy that I'd like to show you. I'll call it Strategy #4 - 2B Version.

2B refers to a method of trading bottoms and tops popularized by a trader, Victor Sperandeo.

Now on this 10 min. chart below, you'll notice HPQ gapped up, and then attempted to fill the gap. HPQ didn't quite fill the gap, and then made a move toward the day's high.

In real time, you would be watching for a normal Strategy #4 breakout above the second 10 min. bar.

Normally on a day when the S&P 500 is up or at least just flat, this stock probably would have broken out very quickly and made a really nice run up. But, because of downward pressure from overall market, HPQ just didn't have enough buying pressure.

Because the S&P 500, which this stock is a component of, made a 2B pattern at around 11:45 am, it caused HPQ to do the same.

Once it did that, a breakout above that 10 min. bar gives you a Strategy #4 - 2B Version entry.

Therefore, it's beneficial to keep these failed Strategy #4 candidates on your radar, just in case a 2B Version becomes available.

There's a good lesson here that some share trading strategies can use what looks to be a failure and with the use of a 2B pattern, turn it into a viable trade setup.

Following is an example.

Chart with share trading strategy using gap & breakout


Below is a chart of the S&P 500 (ETF - SPY).

You can see what I was referring to above and why HPQ was held back from creating a normal share trading Strategy #4 breakout.

Chart of SPY (S&P 500)