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The hardest thing about trading is knowing where to start…
But you see, finding success in the markets all starts with identifying and testing patterns.
The problem is though, there are hundreds of thousands of those patterns floating around out there…
But I want to focus on a type of pattern you might have never heard of.
It occurs when the masses overreact with exuberance – often irrational exuberance.
It’s so powerful, it could hand you your next triple-digit profit…
Patterns Driven by the Masses Can Serve Up Massive Profits
A prime example of this pattern is the case of Alan Greenspan. In the late 1990s, Greenspan essentially predicted a crash of the dot-com bubble, referring to the meteoric rise of the dot-com–laden Nasdaq as caused by "irrational exuberance."
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But let's take a closer look at the mechanics behind this phenomenon.
Stock gaps are a technical pattern often caused by exuberance, although not always irrational. A gap is often, literally, a gap in a stock chart created when a stock suddenly changes price outside of the average trading action.
A well-known example of this is gaps created by an earnings announcement. The chart below on Wynn Resorts Ltd. (Nasdaq: WYNN) shows a handful of gaps created by earnings announcements as well as news-related gaps that occurred outside of earnings.
Gaps are created when the enthusiasm of sellers outweighs the enthusiasm of buyers, or vice versa. Of course, when companies release earnings that either exceed or fall short of analysts' expectations, exuberant buying or selling is often the result, creating gaps in the stock chart as shown above. This exuberance is typically indicated by high volume as shown in the graphic.
But with all this being said, I know the one question on your mind is most likely: "How do we trade gaps?"
The answer? There are many ways.
The Single Best Way to Play Gaps for Major Gains
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.