There are few key elements of the morning gap. It is important to understand these these building blocks first to know how to trade the morning gap.
What you have to remember, is that you have a very short time window to execute your trades and for that it is important that you have to be able to quickly process all the clues that are given to you.
Volume
Probably volume is the most important tool that you can have available to you. Being a trader, it is essential for you to understand the significance of high or low volume, especially when it occurs at important support and resistance levels.
When high volume is attacking a support or resistance area and pushing through it, then this indicates that the sellers or buyers are in control and that in order to actually signal a continuation in trend for a larger period of time enough energy has been exerted.
However, it is not necessary that a light volume is a bad thing. With light volume stock is allowed to ramp much higher and much faster as compared to what happens if there would be heavy interest in the stock.
Volatility
You have to keep in mind that it is very important to understand the principal of action and reaction.
When stocks move extremely fast, up or down, then high levels of volatility risk is there on the opposite side and this indicates large moves up and down. At this point emotions gets the control and technical analysis means nothing. Remember that higher volatility leads to larger swings which in turn lead to irrational market movement.
That is why, it is more beneficial to trade larger cap stocks as they attract the big money, hence reducing the massive levels of volatility that can be seen in small cap stocks.
Risk Tolerance
It looks very simple but it isn’t when you are in the trade. Before starting your trade define your trading risk profile; You need to define the amount of money you are willing to risk and you have to understand if a potential trading candidate fits in line with your risk profile.
Owing to the violent whipsaws that occur in a high volatility stock, you may go out of an otherwise good trade. You should never trade the stock, if you cannot emotionally handle large swings.
Always remember that consistency is the key in this game and you must not be willing to to disrupt that with large losses in the account, no matter how much you are tempted.
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