What is ‘Gapping’
In general, a trading strategy in which the participant borrows short and lends long. This strategy gives the lender an overall better interest rate as short rates are generally lower than long rates. Also in technical analysis, gapping can refer to the use of a gap strategy which looks at stocks that display price gaps from previous closes.
To employ a gap strategy an investor can scan the morning prices for a gap and watch to see what the stock does in the first couple hours of the trading day. In general, if the price goes up, it signals a buy, and if it goes down, a short. There are several variations of the gap strategy.
How to use gapping in your trading strategy
Gapping is a common phenomenon in the stock market that can present opportunities for traders. When a stock gaps up or down, it means that there is a difference between the current price and the previous day’s close. This can happen for a variety of reasons, including news events or earnings reports. Gaps can provide traders with an opportunity to enter or exit a position at a favorable price. However, it is important to be aware of the risks involved in trading stocks that gap. For example, if a stock gaps down, it may be due to bad news that has not yet been fully priced into the market. As such, it is important to do your research before entering into any trade. When used correctly, gapping can be a helpful tool in your trading strategy.
The risks associated with gapping
Gapping can be a profitable strategy, it also comes with a number of risks. First, gapping requires a high degree of timing and precision. If a stock gaps up or down outside of the trader’s anticipated range, it can cause losses. Second, gapping can also be emotional and stressful. Traders need to be able to maintain discipline and not let their emotions get the best of them. Finally, gapping is often considered a high-risk/high-reward strategy, which means that traders need to be prepared for both potential outcomes. Given the risks associated with gapping, it is important to approach this strategy with caution and only use it if you are comfortable with the risks involved.