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If, however, buying begins to diminish, prices will decline, falling through the gap and into yesterday's trading range by penetrating the previous day's high. This will be cause for concern to those who bought the higher opening and to those who exited short positions. Those who bought the higher opening and are concerned that a top has occurred will rush to sell their longs.

And those who covered short positions on the opening will enter the market to reestablish their short positions. The combined selling of these two groups will force prices lower, and you hope you will be on the correct side of the market by being short. Naturally, both the gap lower buy trade and gap higher sell trade are closed out by the end of the trading session if the rules are being followed.

Stop Losses and Follow-Up Stop Losses on Gap Trades. Frequently, gap lower or higher openings will produce fairly large moves within the day time frame. The professional day trader will want to maximize on these signals not only by having a specific stop loss but also by attempting to lock in as much profit as possible so that in the long run overall risk exposure may be minimized. I cannot overemphasize this last point.

In order to do this I offer the following suggestions regarding stop losses and trailing stop losses: When a gap signal trade has occurred, make certain that once you are in a reasonably profitable position, you place a stop loss to exit that position at your commission cost plus a small amount of profit so that if the market reverses course, you will have been stopped out without losing any money in most cases.

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