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YOU NEED TO KNOW

TRADING GAPS

THE LAZY GAP TRADER

EVERYTHING

This report is a summary for the gap trading strategy outlined in the accompanying
video based gap trading course.
All trading and investing comes with a high level of risk and you can lose money if
risk is not managed properly.
These techniques should only be applied by experienced traders.

What is a gap?
The difference between the closing price and the following days opening
price of any market, stock, or other trading instrument.
Gaps are mainly caused by an earnings release, news items specific to
the company or industry, and any other reason you can think of, but
were not concerned with the reason why, only the trade and if we can
find a good support or resistance level that will provide a profit
opportunity.

Types of Gaps Trades Covered in the Course


There are two very specific and actionable types of Gap Trades the
course focuses on.
Morning Gaps
Stocks that open much higher or lower from where they closed the prior
days session are known as Morning Gaps. These provide an enormous
opportunity for those traders that understand how to find and identify
the price level where these stocks should find at least a short term
support or resistance price where a trade can be taken from an expected
reaction. In the course, youll learn how to identify these price levels,

The Lazy Gap Trader

recognize how much of a reactionary bounce they should have, how


much risk to take and how much profit to look for.
There are specific price levels where the Institutional traders are very
likely to support or distribute a stock. These price levels can be found
and calculated using simple mathematics. You will learn precisely how
to calculate these price points. In addition, youll also learn how to
identify the highest probability set ups and how to avoid the ones that
have a limited chance of success.
Can you imagine catching a low on a stock similar to the one depicted
below?
An example of a morning gap trade looks like this:

The Lazy Gap Trader

Gap Fill Trades


The second strategy taught in the course is taking advantage of stocks
that come back to fill their gaps. Not all gaps are created equal,
therefore, its extremely important to understand which stocks work the
best, how they arrive at their gaps and what type of reaction you should
expect from the Gap Fill. All these items are discussed and taught
throughout the course.
Its equally important to understand which stocks work the best with
these strategies, and which ones to avoid. If you understand the
characteristics of how a stock should fill its gap, then you can begin to
realize the profit potential these strategies afford those that wish to
profit.
An example of a stock filling its gap looks like this:

The Lazy Gap Trader

Why does trading the gaps work?


More often than not price will retrace to an opening on a chart known
as a gap. This is also known as filling the gap. There is no hard and
fast rule about filling gaps, although most gaps do get filled at some
point.
Were focused mainly on the gaps that get filled in a short period of
time, although these strategies and techniques work no matter when
the gap is filled.
The numbers never lie. We know most gaps get filled. More
importantly, we know by mountains of historical data what the typical
price reaction of a stock or market is after it approaches the gap.
Furthermore, using the same historical data, we know precisely what
conditions on a chart will increase the probabilities to determine what
price will do once it reaches that level. (in other words, we know what to
look for that will increase our probabilities of making money)
Lets break this down and look at it a little differently.
Imagine you have a business with a product thats in constant demand.
You have a great relationship with a supplier who gives you fantastic
prices, and best of all, very few of your competitors know about it. The
product and supplier are extremely predictable and consistent.
No matter how much product you take on, the large majority of the time
youre able to immediately turn a profit, and the few times you dont the
losses are very small and manageable.
For years youve been selling the same product line, from the same
supplier to the same customers day after day, month after month, and
so on, for years.

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What you have done is developed a step by step process that produces
predictable and repeatable results.
Theres no doubt you will see the similarities with Gap Trading.
If you can follow a system with a daily process for finding stocks that fit
the gap trading criteria, then applying rules to narrow the field to the
highest probability winning trades, then you can turn a system into a
profitable business.
Thats why Gap Trading works!

Narrow the field


Many of you have read technical analysis books, taken trading courses
and still find yourself in a never ending search for simple answers to
what seems like a complex question of how to make money in the
markets.
Of course there are countless methods of trading and investing. Many
of them with merit, and more often than not its the trader or investor
that makes the difference.
This system is no different. You must apply the process, rules and
discipline to find success with gap trading.
We start with defining this version of gap trading. There are several
text book definitions and methods to trade gaps. Were going to discard
a large majority of those scriptures and focus our efforts on a narrow
segment of the market we know to be fruitful. (Let everyone else
continue to bang their heads trying to follow less effective strategies)
You may have heard terms like breakaway gap, continuation gap,
exhaustion gap and others. Block them out for now.
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Were focused on morning gaps and gap fill. Were focused on trades
where we can scalp profits at a predictable and high probability, and
trades where we can hold for maximum profit by reducing our risk to
zero. (Yes, this exists while youre in a trade)

Some housekeeping and slang


There are some general terms and concepts to learn that will become
the foundation of our gap trading strategy.

Gap window
When a stock opens higher or lower from the previous days close, that
price level becomes support or resistance. This will often become an
excellent trading opportunity when the rules are applied.

Gap fill
When a stock fills the open space left by the price jump or decline on the
day it gaped up or down.

Chart setup
Japanese candlestick charts work the best for this process. We have
the body of the candle where well find the open and close for the day
and the wick which shows any price extension of the high or low for the
day.
The time duration of the charts we use is very important. At times
were going to utilize five different time frames. The 10 minute, hourly
or 60 minute, daily, weekly and even monthly charts will all be used to
determine if a trade setup has the probabilities in our favor. The longer
time frames are used to find the best morning gap trades where we can
The Lazy Gap Trader

find the price level where the institutional traders are likely to either
purchase or sell a stock with size.

The daily process


In the course, youll learn exactly what you need to do each and every
day to be successful. Youll learn how to identify the right stocks, at the
right price. Youll learn what to look for in terms of how a stock is
coming into or approaching an important level. Youll learn how to
manage risk properly. Youll learn how to know and understand how
much profit to be looking for on a trade, therefore you have an exit
strategy before you even enter the trade. Youll learn how to calculate
how much risk is appropriate on each trade based on the size and price
of the stock.
1. First we have to scout out a listing of stock that are gapping up or
down at the open. This is a simple process with the volumes of
free information available on the internet. Most brokers who
provide a trading platform also have stock screeners and hot lists
of whats moving for the day. Within these lists are categories
for stocks moving up or down in either dollar or percentage terms.
Bingo, this is what were looking for. This information can also be
found on sites like http://finviz.com and
http://www.tradingview.com
2. Next we narrow down the list to only the stocks were interesting
in trading. We immediately eliminate low priced stocks, no stocks
under $10 per share, preferably $20. We will not trade stocks
with average daily volume under 500 thousand shares. The
higher the better.

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3. From the refined list, we now determine which stocks have an


early morning scalping opportunity. This is done using a
mathematical formula, previous support and resistance, pivot
points and other information to determine where the stock might
travel to in an extreme move up or down. We focus on these early
in morning because they have the highest chance of immediate
profit if our objective is reached.
4. Now put all the stocks on a specific watch list that will constantly
be monitored and harvested for profit over the coming days and
beyond. Each chart will have an alert and trend line identifying
the buy or sell price level. Visuals work best. This becomes our
living gap fill list.

Tool Box
There are many useful tools that play an important role in analyzing
markets. Each analyst uses technical strategies that are important and
relevant for their work. For gap trading, we need just a few simple
ones. Youll use trend lines to draw a visual of where price needs to go
for you to get interested. A Fibonacci retracement tool, in some cases
will help to find or support the case for price objective. In the videos,
you saw how finding prior support and resistance or pivot points
enhances the probabilities your price level will work.
The concept is to keep it simple, follow the process and use only whats
needed. The more tools and analysis you do, the more uncertainty you
will create. Uncertainty will bring out your emotions and undoubtedly
limit your success.

The Lazy Gap Trader

Money Management
In any trading activity its important to adhere to strict capital
preservation and risk management measures.
There are two primary components to managing your capital
while trading gaps.
1. Establish stop loss and profit targets for each trade. While its
not an exact science, there are rules of thumb that work well.
Using between and 1% of the current market price of the
stock has been a good guide as long as youre able to use some
discretion and avoid the greed factor. The lower the price of the
stock, the less of a reaction or bounce will occur off an
important level. Conversely, the more volatile a stock is the
wider range you can expect it to trade. These are the ones that
may require a little more rope on the downside if you can
tolerate the wait, but the higher volatility stocks will give you
more profit when they get going. For example if GE is trading
at $27 per share and gaps down 5% at the open which
represents a $1.35 move, we may only be looking for about a
$0.25 profit objective. However, if AAPL is in play, the
objective may be larger. In the Gap Trading course, you will
learn specifically how to determine what profit objective is
appropriate for each stock you trade. Maintaining a stop is
extremely important because a stock making large moves at the
open can travel farther than most people realize which can
result in a quick loss of capital. Sometimes, youre first loss is
your best loss. You must realize, we do not and cannot win on
every trade, but if youre win percentage is high enough, and
you have discipline in your money management, then youll be
a winner.
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2. Youll learn how to maximize your profit on a trade while


reducing your risk to zero. Lets say youre taking a trade
based on Disney (DIS) filling a gap. You know your stop and
your initial profit target. You enter the trade and buy DIS at
$100.00 with an objective to scalp $.60 in a matter of seconds or
minutes. (happens all the time) Its working out and you find
yourself ready to take the profit and move on. You bought 500
shares which puts $300 in your pocket on this single day trade.
But wait, theres more. What if you only sold half the position,
putting $150 in your pocket and placed a stop loss at either
break even (your purchase price) or slightly higher. This way,
you have the opportunity to hold Disney for higher prices. If
the stock climes higher throughout the day, you continue to
move your stop higher. What happened here was you
guaranteed yourself a profit on the trade, took the prospect of a
losing trade off the table and positioned yourself for higher
prices and more profit with no risk and no emotion involved.
Youve seen from the examples in the videos how this strategy
works and puts you light years ahead of the average trader.

Hard and fast rules


1. Do not trade after hours or pre market unless youre very
experienced and fully understand the risks involved. Stocks trade
much less volume outside of normal trading hours. Strange things
can happen with limited liquidity. Caveat emptor.
2. If a stock gaps above or below a target entry price for a trade, take
it off the table unless you have a secondary level of support or
resistance.

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3. Dont chase a stock up or down. As the price begins to get close to


objective, place a limit order at your desired price and let it
happen. Never use market orders.
4. Not all trades will work out the way you dream, its part of the
business. This is a risk business and you must understand each
and every time you enter a trade you dont know exactly what will
happen, you are making decisions based on what you believe to be
the highest probabilities available. That never means 100%.
5. While waiting to enter a trade, if the stock comes close to your
objective and trades away close to or more than the amount your
profit objective would have been, but comes down later to your
desired entry price DO NOT take the trade, it already did what
it was supposed to do and the probabilities of it happening twice is
greatly reduced.
6. DO NOT make up your own rules.
7. Click Here for additional information about the Gap Trading
Course.

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