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How To Trade Gaps That Just Won't Go

I’m writing in the midst of a four-day green streak, which I am counting as a huge win after some of the recent red days I’ve had. My last down day, which took a $5,700 chunk out of my trading account, ended up pinging my brokerage loss-limit and (thankfully) kept me from revenge trading my way out of another three or four grand.

Still, this hasn’t been the easiest market to trade, especially for our bread-and-butter, gap-and-go setups. Part of this is the lingering choppiness of a market still trying to find its direction after surging for the better part of two years. But now the entire market has trade fears on its collective mind, which puts any breakouts at risk of breaking down.

I’ve tried to keep that in mind while looking for potential setups. Market confidence is wavering in the midst of the developing tariff battle, and overall this year there just hasn’t been the volume to support many double-digit-percentage gappers from popping and dropping.

I spoke about this in my last recap about MER Telemanagement Solutions Ltd. (NASDAQ: MTSL), which broke out almost 50 percent over its $1.40 open, but then collapsed after a brief pop at $1.80. We saw it earlier with Gevo, Inc. (NASDAQ: GEVO) and Caladrius Biosciences, Inc. (NASDAQ: CLBS) earlier in the week. Traders just don’t have confidence to give any sustained volatility to trade off of.

In a lot of these cases, there is just too much selling pressure, too much uncertainty, to support pure momentum plays. Instead, I’ve shifted my attention to trading indicators that emphasize volume and float, as well as taking a closer look at extended moving averages for 20 or 50 days for a sense of the density of traders with their eye on a given stock. I’ve probably said this before, but I try to find the right amount of liquidity for the market environment. Right now, I want to find something with a little bit higher float that can sustain an uptick in trading without scaring off buyers.

That’s just one approach to these continually choppy markets. It’s proven successful this week, but the most important lesson I’ve learned from the first half of 2018 is to not get comfortable and to stay on my toes.

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