Watching a new trader start out is often like viewing an old episode of Supermarket Sweep. The idea of the show was to load your cart with the most expensive products you could in the time allotted. In the end, the total value of the items determined the winner.
In their zeal, some contestants would indiscriminately pile stuff into their cart willy-nilly. While they may have taken pride in their ability to finish first, they would inevitably lose to the smarter shopper. The winners would often sacrifice speed for strategy. It wasn’t about quantity, it was about quality.
Like the misguided contestants, some traders buy stocks without much thought to their quality. Such an approach simply adds to the difficulty and diminishes the odds of profitability. One group of stocks of particular low quality are those of the “holy” variety — not those anointed by some trading priest mind you, but rather those that resemble Swiss cheese. They are literally filled with holes, littered with gaps.
A gap occurs in a chart any time a stock opens noticeably higher or lower than where it closed the prior trading session. For example, if a stock closed today’s trading session at $50 and opened tomorrow at $53, it would reveal a $3 gap in the chart. Stocks that frequently gap make it difficult for traders to buy and sell at the price they want as certain prices are skipped over.
Consider the chart below, with the major gaps labeled with the letter G:
Source: MachTrader
The bulk of these so-called holy stocks are likely American Depository Receipts and exchange-traded funds, which must gap to compensate for any after-hours movement that has occurred in whatever security or securities they track.
Take China Mobile (NYSE:CHL) or Posco (NYSE:PKX) or Toyota (NYSE:TM), for instance. All are gap addicts bent on making a mess of their charts.
If you insist on trading these types of securities keep in mind they are better vehicles for either day-traders or those with long time horizons. Day-traders aren’t susceptible to gaps since they always close their positions by the end of each trading session. And long-term traders can often treat the day-to-day gaps as irrelevant noise.
