Gaps: A trader’s worst nightmare or their best friend?

One of the biggest dreads I’ve had during my limited time as a trader is the fear of a stock gapping up or down. For those that don’t know what it is, “gapping” is when a share’s price either rises or falls severely when the stock market opens for the day. Why could this be either a good or a bad thing? Well, if you’ve gone long and the stock gaps up, that’s great news for you as you could take double, or even triple your original profits. Great, right?

Well, that could happen in reverse if it gaps down.

While I was trading, one of the lingering worries in the back of my mind, especially when going long, was “what if bad news comes out and the stock gaps down?” If that happened, I would be cleaned out in an instant. The most recent event of serious gapping that I can recollect is from the currency pairing EUR/USD, when during the weekend, exit polls show that Greek anti-austerity party Syriza were going to be elected in power. I would say my prayers during that weekend if I had money on that.

Alternatively, however, what if you went short? The gains would be exponential and, in that case, you would surely be rejoicing at the news coming from Greece. The bottom line is, it’s a gamble whether a stock is going to gap or not in the first place, and it’s another gamble when you realise that there’s a 50/50 chance of it going for or against you. And there’s absolutely nothing you can do about it.

My God, trading can be stressful sometimes.

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