hey what's going on traders thanks for checking out this video my name is Travis for master the
market and this is going to be a quick video talking a little bit about swing trading
and i'm actually going to be giving you a swing trading strategy that i've used for several years
in my own trading and in my experience this has been a very consistently profitable strategy
so let's go ahead and get right into this gap close reversal strategy and i'll explain to you
what exactly it is and how it works now in order to get into the strategy itself it's important to
actually understand what exactly a gap is in the stock market and to know exactly how they actually
form so i have an example here of netflix's stock and if we look over here on the left side of the
screen this is the daily chart for netflix so every single one of these candlesticks is
representing one entire day of price action and if you look actually a couple of weeks ago you
can see that there was a big gap in the stock from about 550 per share all the way down to
the next day the low 500s now the primary reason that these gaps actually form in the stock market
is because when you're looking at the daily chart the daily chart simply shows you the price action
that happened within the market hours so anything that happens in after hours or anything that
happens in pre-market is not going to be displayed on that daily chart and because a large majority
of the time a company is going to release news in after hours or in pre-market which is the extended
hours period that's going to cause a lot of movement that actually happens in extended hours
that is not going to be shown on that daily chart so for example when we look at netflix on this day
over here is the 5-minute chart and this gray section on the left side of the screen
is actually going to be that extended hours period that is not shown right here on this daily chart
so this big sell-off to the downside that we see in netflix on the five-minute chart
again is not going to be shown on this daily chart and is then going to just appear as a big gap
or a big empty space on the daily chart once the market opens for the day
and in netflix's case this happened because the company put out their earnings report
and for the first quarter of this year netflix was reporting that they have a significant slowdown
in their growth of subscribers which obviously the market took as bad news and the price of the stock
fell down okay so now that you have a little bit of understanding what gaps are in the stock market
believe it or not there are quite a few different ways and different strategies that can be applied
to these gaps for both day trading and for swing trading now in this one we're going to talk about
the gap close reversal strategy which is primarily used for swing trading but you can actually use
it for day trading as well and because gaps do present so many different trading opportunities
in the market i actually do have several other different videos going over different trading
strategies already posted on my channel so i'll go ahead and link those down below in the description
but to summarize here what we're looking for for this specific gap close reversal strategy we first
want to see that there is a big gap on the daily chart and the whole idea behind the strategy is
that gaps do tend to fill over time so whether that be a few weeks later or a few months or even
a few years later that gap is most likely going to fill up to 550 per share in this case for netflix
and at that point what we would look for in the stock is a reversal back to the downside from that
price level now because most traders aren't really that interested in short selling which would allow
you to sell high up at 550 and then profit from that reversal coming back down to the low 500s
ideally what you're going to see is that the gap is actually going to be below
so that way once the price fills that gap to the downside that gap close is going to become a level
of support and the price is going to bounce back up for you to buy into and then actually profit
from the price going back up after that gap close reversal does happen so another quick example of
that is if we look at microsoft's chart um we can see here if we look back in the past couple
of months that there are a few examples actually of a gap close reversal that would have offered
some really great swing trading opportunities for microsoft uh first if we look over here
we can see that there is a gap here from about 205 dollars per share
up to the following day about 212. just a few days later the price pulls all the way back down
actually fills that gap to the downside and spikes back up recovering all the way back up to that 212
high and actually goes significantly higher way up to over 230 dollars per share so again the idea is
that you're going to look for this gap to fill and you're going to look to buy into the bottom
range of that gap anticipating that the stock is going to bounce back up once that gap in the daily
chart is then filled by price action okay so if we go ahead and fast forward just a few months here
still looking at microsoft's chart you can see again there's another example where there is a
gap to be filled down here at about 208 dollars per share most likely the reason for this big
gap up here is some kind of news that was released in extended hours by microsoft
but regardless over the next couple of days and couple of weeks the price pulls all the way back
down to that gap close reversal point uh at 208 dollars per share and you can see in this case
that that 208 dollars acted perfectly as a level of support so once it got down to that 208 level
the stock started to perfectly bounce from that price and we can see over the next couple of weeks
in couple of months that it actually ended up forming a strong uptrend off of that price level
which would have been a really great swing trade opportunity for anybody looking for that gap close
reversal to buy into now another quick example to show you that this is not just going to happen in
the really well known and the higher price stocks which are known as blue chip stocks so like apple
amazon facebook google those types of stocks but we do actually see this happen pretty commonly in
penny stocks as well and if you're interested in trading penny stocks because of the potential for
much larger returns a really great example of this that i noticed is going to be here on the chart
for dpw uh so if we go way back nearly to a year ago you can see that there was a big gap up in
this chart from about 1.50 cents all the way up to the following day of over three dollars per share
so if you happen to be watching this stock and you were looking for a potential price to buy into it
the gap closed reversal point is going to be down at 1.50 which is of course where the price was at
before it had this major gap up on the daily chart so if we go ahead and draw a line there
on this chart you can see that a few months later that price level started to act pretty perfectly
as a level of support not only on one occasion but actually on two occasions before it had this
massive spike up all the way up to nearly eleven dollars per share now obviously you're not going
to see you know 200 300 400 returns every time you see a gap close reversal in the stock market
but this is a really great example of how accurate this strategy can be for not only blue chip stocks
but also for these lower price penny stocks which can of course offer us huge returns in certain
occasions so if we go ahead and remove this line now and fast forward a bit there's actually
another great example here on this same chart for dpw um actually on the day that it had this
massive gap up so now this time the gap closed reversal point is going to be in the low twos
i'm at about two dollars and ten cents per share so if we go ahead and draw that line
again you would look for that price as an opportunity to buy into the stock for a swing
trade and you can see just a few weeks ago as the price closed that gap it started to bounce back
up from about two dollars per share all the way back over three dollars per share which compared
to the previous spike from a couple of dollars all the way up to 11 may not sound like much but
that still is potential for over 50 return just by looking for this gap close reversal strategy
and by buying in at that level of support okay so with all of that being said the one and only
downside to this strategy is that in my opinion it can be very difficult to find these setups
in the market because a lot of times when we're looking for day trades or swing trades
what we do is pull up some kind of scanner or some kind of screener and we type in the criteria
that we're looking for in order to get a list of stocks that are specifically meeting that criteria
and because we're looking for these gaps that can happen you know months ago or even years ago it is
very difficult to put that criteria into a scanner and actually find these stocks in real time so in
my opinion even though this is a great strategy it's kind of just one of those ones that you
don't necessarily actively look for but instead once you see a big gap on a daily chart um and
the price is starting to close that gap you simply look to take advantage of it when that time comes
okay so that's going to be a wrap for this quick video on swing trading in the gap
close reversal strategy thanks for watching and i hope you enjoyed and found this video helpful
if you did please make sure to give it a like and subscribe to the channel so you don't miss out on
future videos and future trading lessons and of course if you're looking for more
information on day trading swing trading and even long-term investing including all of the
basics that are very beginner friendly as well as other more advanced trading and investing
strategies all of that can be found on my website master the market which is going to be linked down
below in the description but anyway thanks again for watching and good luck with your trading
you