Beyond FOSO: Trading the Gap

Today in our Beyond FOSO column, we are covering Alphonso Esposito's mastermind class: Earnings Explosion. Alphonso is a retired owner of a successful day trading room and now is a highly sought-after trading mentor. He is most known for simple, time-saving strategies and has served the trading community as an instructor at Tradesmart University since 2010. He has taught Power Trader Live and Risky Business and brings his wealth of knowledge on the subject of trading gaps to his Earnings Explosion master class.

​​What is a Gap?

Alphonso's Earnings Explosion class focuses on one strategy and one strategy only: trading gaps. A gap occurs in the stock market when there is a price break between candles of two adjacent periods on your stock chart. For example, if GE closed at $13.40 on Wednesday but opened the market at $13.60 on Thursday morning. The stock gapped up to $.20, which is reflected in the image below.

​How to Find a Gap?

It would be awesome if we could place a trade to take advantage of a gap before it formed; however, that is next to impossible to do, which is why Alphonso teaches you what to do after a gap has formed. Usually, one of the best places to look for gaps to form is when company earnings are announced. If a company releases its quarterly earnings numbers and they are up from the previous quarter, the stock price will gap up during overnight trading. However, if a company releases their quarterly earning numbers and they are down, the stock price will gap down in the following period. In most cases, the news and earnings cycle drives the creation of gaps during the trading-off hours. This makes finding your trades much more manageable as all you have to do is find the gaps after they have occurred.

​How to Play a Gap?

Now that you have found a gap, it's time to figure out if the gap is tradeable or, as Alphonso likes to say, "in play." The first thing we look for is volume. If the number of active shares being traded has dramatically increased, we consider that stock to be in play and a good choice for launching a trade. Usually, when a stock gaps, the stock price moves in the same direction as the gap, and if there is a high probability of a short and intermediate move which we can trade.

​Then the following questions to ask would be where the stock is gapping from and where is the location it is gapping to. Does it run from a demand or supply zone? What does the gap candle look like? Is it a wide range bar, a Doji "ish" candle, or a bottoming or topping tail? These questions are the best part of Alphonso's class and where, in my humble opinion, his presentation shines. Since only fifteen percent of the class is teaching the gap strategy, the remaining eighty-five percent of the class is the real-world application of trading around gaps. Simply put, Alphonso shows you how to enter and participate in gap trading by using real-world examples and that makes this class worth every penny as his real world analysis is priceless.

In Closing

There is a plethora of trading wisdom out there in the world, but trading gaps is actually straightforward and involves less time and analysis than other strategies. This strategy needs little to no indicators and offers a high probability of short and intermediate stock moves. A stock becomes in play when there is a charted price imbalance, and we learn to take advantage of the possible trade opportunities based on the market fluctuations. In short, Alphonso teaches you the keys to finding gaps and how to profit off the created price imbalance. Highly recommended learning.