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The hardest thing about trading is knowing where to start…
But you see, finding success in the markets all starts with identifying and testing patterns.
The problem is though, there’s hundreds of thousands of those patterns floating around out there…
But I want to focus on a type of pattern you might have never heard of.
You see, this pattern occurs when the masses over-react with exuberance, and many times irrational exuberance.
Patterns Driven by The Masses Can Serve Up Massive Profits
A primetime example of this pattern is the case of Alan Greenspan. In the late 1990’s, Greenspan essentially predicted a crash of the Dot-Com bubble referring to the meteoric rise of the Dot-Com laden Nasdaq, as caused by “irrational exuberance” and that he didn’t know how to trade them.
But let’s take a closer look at the mechanics behind this phenomenon.
Stock gaps are a technical pattern often caused by exuberance, although not always irrational. A gap is often, literally, a gap in a stock chart created when a stock suddenly changes price outside of the average trading action.
A well-known example of this is gaps created by an earnings announcement. The chart below on Wynn Resorts (WYNN) shows a handful of gaps created by earnings announcements as well as news-related gaps that occurred outside of earnings.
Gaps are created when the enthusiasm of sellers outweighs the enthusiasm of buyers, or vice versa. Of course, when companies release earnings that either exceed or fall short of analysts’ expectations, exuberant buying or selling is often the result, creating gaps in the stock chart as shown above. This exuberance is typically indicated by high volume as shown in the graphic.
But with all this being said, I know the one question on your mind is most likely: “How do we trade gaps?”
The answer? There are many ways.
The Single Best Way to Play Gaps For Major Gains
Now, one of my favorite ways to take advantage of a gap BEFORE it happens is the straddle.
A straddle is a trade that consists of buying a call option in the event that the stock goes up and a put option in the event the stock goes down. For these trades to profit, the stock needs to gap enough to offset the loss of one of the losing legs.
Another way to benefit from the phenomenon of gaps is to predict the direction AFTER the gap.
A common belief is that stocks will “fill the gap” (return to the price before the gap). This is sometimes the case, but not always. A stock may continue in the direction of the gap, as well.
So, the best way you can play it: simply wait until after the gap and let the stock tell you which way it may go.
To do this, identify the high and low of the gap day. If the stock closes above the high of the gap day, go bullish and vice versa. The Nordstrom’s (JWN) chart below illustrates a bullish entry as JWN closes above the high of its gap day following earnings:
Entering on the close of the day above the high of the gap day resulted in a 12% run up in the stock.
Managing the exit is the most important part of this strategy (as with any strategy). A simple trailing stop loss is the simplest way (15-20% on stock / 30-50% with options). You can also use moving averages like the 10-day and 30-day moving averages. When the stock closes on the opposite side of the 10-day or 30-day moving average, exit the trade.
By using this obscure pattern – you can find success and profits in the blink of an eye.
But listen, this is a great opportunity, but I like to take my recommendations a step further…
Because when it comes to making fast cash, you shouldn’t have to spend hours researching the next move, or guess which option trade to make, needlessly risking all of your hard-earned money.
That’s why today, I’m taking it a step further and showing you the best way to double your money right now.
In this presentation, you’ll not only learn about the easiest way to set yourself up for a move that boasts an unlimited profit potential…
But I’ll also reveal the exact trade details you need to make your move. Everything you need to know to get access to this video is right here… but just a head’s up, you’ll need to move quick to take advantage of it.
America’s #1 Pattern Trader
— The Option Specialist