August 28, 2013:
Today we’re going to go over an important stock market investment strategy – learning how to invest by using price gaps. First we’ll go over the strategy and then we’ll look at placing an actual stock trade.
Let’s talk a bit about price gaps in stock price charts. This is something I have not talked about before in the Stock Market course.
A gap is simply a price movement from one day to the next that is outside the previous day’s range. These gaps occur because of news or other influences on the stock’s price. Very good news (better than expected) can cause the stock’s price to gap up. Negative news (worse than expected) can cause the stock to gap down. Let’s look at a chart of Facebook (FB).
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Facebook had a huge gap on its earnings announcement, which was much better than expected. Remember, expectations get baked into a stock’s price, but when the reality is much different that what was expected, stocks react with big moves, both up and down.
I previously bought Solar City (SCTY) in March 2013 at 16.78 and sold it in May 2013 – most of it at 51.15 and the final batch at 44.79. That was a great trade. I like the Solar City’s business plan and its sector, and I’ve been looking to buy the stock again. Let’s look at its chart.
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I am placing a buy-stop order to buy Solar City (SCTY) at 29.30, right at the bottom of the gap. The order is good-til-cancel. If my order is filled I will place a sell-stop order right below the gap price back in May. It should not go there if the trade is to succeed.
Note: The stock market is in a correction, so this is a high risk trade that has a greater than usual chance of failing.
Be sure to place this stock market investment strategy in your toolbox – it will help you increase your investing returns in the stock market.
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