How Gaps Are Rated

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All Gaps must be rated as a Tier I, II, or Tier III Gap which is a measure of "Shock Value".  Here are the five points to rating gaps in the market...

  1. Did the gap clear Support or Resistance?  Ex.  Such as a pivot or base on the 60 minute or Daily Daily chart.
  2. Does the short term pattern get a point?  Ex.  Gaps over a wide range bar in the opposite direction (ex. gaping over a previous days red bar), AKA Mortgage Gap/Monster Gap.  Could be a series of same narrow range bars.  Most important question, does it create "Shock".
  3. What has happened in the long term pattern, meaning the daily and weekly charts, is it a Pro or Novice gap?  If Pro, it gets the point. or gaping from a base gets the point...
  4. Does the gap have relative strength or weakness that correlates to the way the stock will be played Vs. the Market (QQQ, SPY).  Ex.  Market gaping up and your stock is gaping down, the stock gets the point.
  5. Is the size of the gap so large that it destroys the technical pattern?  No, gets the point...

Pro Gap - Gaps up or down and reverses the previous trend.

Novice Gap - Gap up or down in the same direction as the previous trend.

Gap Disease - Gaps down from a new high.

Entries:  

  • Tier I gaps get all 5 points when rating the gap and can be entered Immediately, but best enter over a 1 or 2 minute high.  "Gap N Go"
  • Tier II gaps get 4 points and can be entered on a buy or sell setup, base breakout, breakdown, 123 patterns, or 5 minute bull or bear 180's.
  • Tier III gaps get 3 points and can only be entered on a 15 minute buy or sell setup and best played later in the afternoon or the following day.  No credit is given to the gap and any play must come from the quality of the intraday pattern.  

10 Responses to How Gaps Are Rated

  1. manny says:

    Hey trader Hank, did you happen to record the webinar you did for the las vegas traders ? It would be great to watch it. Thanks!

    • TraderHank says:

      No I did not, maybe next time. The software used for the webinar was free and did not offer a recording option….

  2. S-Trader says:

    TraderHank – Great site you have here, so glad I discovered it. I’m currently a PTT-wannabe, but have attended many, many of their free events and studied a lot of whatever material I could find. I’m surprised that there aren’t more individual PTT blogs out there, given the thousands of traders that they’ve trained — or at least, yours is the first I’ve been able to find after much searching.

    One thing I haven’t figured out regarding the gap scoring system: where does “tradable void” fit in? I’ve seen one of the coaches list it prominently in his criteria — which makes sense — but he didn’t have the items listed directly in relation to the five points, so I couldn’t tell which of the five items it fell under. I also don’t even see “void” mentioned in your piece above. Could you please clarify that for me? Thanks.

    • TraderHank says:

      Tradable void would refer to Item #1 “is the stock gapping over or under support/resistance. If you take a look at the daily chart on GILD, you will notice that the gap cleared major support but gaped a little too far into the next major support area, this is the reason I had the gap rated as a Tier II and therefore I needed a pull back before taking a play short. As price gaped into the next major support area it basically used up the void that would have been there Vs. if the gap had just cleared the first area of Major Support, then there would have been a void down to the 2nd Major Support area and I would have been more aggressive at the opening for a short play. I have added the daily chart with notes to my post on this mornings trade in GILD…

      • S-Trader says:

        Thanks! I understood the concept of tradable void relative to S/R, but I wasn’t totally sure where it fit in within the context of their gap rating system. Your response is very helpful in clarifying that for me. I’d been kinda sticking it in with “long-term pattern” because I didn’t know– so while I have been considering all of the same elements in total, I guess I’ve been mixing them up relative to the formal point system. I’m much improved at finding the best gaps, which is the bottom line… but I’d like to use the established point system properly just to be on the same page with all of you.

      • S-Trader says:

        Hi Hank, hope you’re doing well. Hope you don’t mind another question/clarification related to my prior one…

        For the #5 – Size criteria, besides being “too big” (0 pts) or “just right” (+1 pt) — would you also rate a gap as “zero” if it’s “too small”?

        If so, then it seems like the #1 – Support/Resistance criteria is kind of implied by the #5 – Size criteria… i.e., isn’t whether the size is “too big,” “too small” or “just right” judged relative to support/resistance anyway?

        So in other words… if we eliminated Criteria #1, and I simply asked you whether the size of the gap was “good/OK” or not, wouldn’t your answer effectively cover both of those two criteria?

        • TraderHank says:

          The answer is no, the size of the gap is referring to if the gap is so outrageous that most traders with the stock already will probably do nothing since the loss is so catastrophic, it actually loses its shock value. You want the size of the gap to have enough shock to make owners of the stock do something.

          • S-Trader says:

            Interesting — thanks, TraderHank! One day I’ll take the course… after I take the prereqs as well, lol.

            Have a great long weekend!

  3. carlos toro says:

    Hi, can you explain please what is a tier gap and the criterion for each level I, II and III ?
    thanks a lot!!!

    • TraderHank says:

      A Tier gap is a gap that we have rated to be a Tier I, II, or III using our rating system. The best gaps to rate are usually gaps caused from earnings releases, they provide the most reliable setups and follow through. Always remember that we are rating the “SHOCK” value of the gap, just imagine that you bought a stock on a day that it triggered a daily buy at the rising 20 MA, just after a prior day’s beautiful bottoming tail. Then, you wake up the next day to find price gaping below the prior day’s bottoming tail, ouch! The panic would cause an avalanche of selling which is the perfect setup to the astute gap player…

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