The most explosive stocks every day are almost always stocks that gap up or down. You see us go over through a list of gappers every day during pre-market because of these stocks have a high probability of making a big move in short period of time, making them great for momentum trading. As a momentum trader, it is critical to understand why stocks gap up or down, how to find the best ones to trade, and how to trade them successfully.
What is a Stock Gap?Stock shares will often move up and down in value during after-hours trading. This will cause a stock to open at a different price than what it closed at the prior trading day. When a stock opens higher than the prior closing price it is called a gap-up. When a stock opens lower than the prior closing price it is called a gap-down. Sites like thestockmarketwatch.com and marketchamelon.com will have lists of most of the stocks gapping up and down every day.
What Causes Gaps?Every day some stocks will release news after-hours or during pre-market. News catalysts are the primary reason why stocks will move higher or lower than their prior day’s closing price. Quarterly earnings releases, analyst upgrades or downgrades, drug trial results, press releases are examples of potential catalysts. Stock’s and ETF’s will gap up and down also due to simple imbalances in supply and demand, and not always have an obvious catalyst for the price change.
Finding the Right Gappers To TradeThere are sometimes hundreds of stocks gapping up and down every day. The best ones to trade will depend on what your strategy and trading style. But in general, the most explosive stocks to day trade have the following characteristics:
- Large Intraday Range
- News catalyst
- No nearby resistance for a long play
- No nearby support for short play
- Former runner, meaning they have made big moves in the past
- High relative volume