By Brandon Wendell, Online Trading Academy Senior Instructor and Trader Mentor
Traders are always asking me about how to view the gaps and what are the trading opportunities associated with them.
Well, I'm not going to give away all the secrets in an online article, you'll have to attend one of Online Trading Academy's courses
or the Extended Learning Track to discover them, (collective sigh of relief from all students). However, I will share one thing to
watch as you are looking at whether the gaps will fill quickly.
Gaps are caused by imbalances between buyers and sellers. If there are no sellers and an overwhelming amount of buyers want into
a stock, they will be forced to raise their bid to the area where there are sellers so they can satisfy their demand. The reverse is
true when sellers overwhelm the buyers. This often occurs when there is news on a company or the markets. In our classes, we also
teach that a trader should center their decision to buy or sell based on the price in relation to supply and demand. Combining gaps
with the supply and demand knowledge offers a powerful price direction indicator.
Looking at the daily chart of RIMM from September 2009, you can see the aftermath of a disappointing earnings release and forward
outlook. Price opened significantly lower after the announcement. The key thing to look for is whether price opened below demand
or above it. If price had opened above, a trader could have expected more gap closure and a gap fade play would have profited.
However, in this case, price opened below the prior demand.
 Figure 1 Breaking the demand level on the gap shows that the sellers could not locate any buyers willing to purchase at the former
level. This is extremely bearish and as a consequence, price continued to slide. The opposite reaction would occur if the
price gaps into, but not past a supply or demand level.
An example of this can be seen in December 2009, in the price chart of RIMM. This time, price responded to positive earnings
by gapping up. Many unsuspecting traders and investors may have entered into a long position after hearing the good news.
 Figure 2 The smart trader would have noticed that the price simply gapped up to prior supply and the sellers waiting there easily
absorbed the buying pressure of the amateurs and sent price lower. Be sure to pay attention to where price gaps into and practice
good risk management. Do not gamble and take positions prior to the announcements and do not let your emotions get the better of
you and jump into a stock before it hits a reversal point. Until next time, trade safe!
Have a great day.
- Brandon Wendell bwendell@tradingacademy.com
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