Breakaway Gaps

• A breakaway gap occurs when the price opens higher than the previous day's close to a new multi-week price high. When a breakaway gap occurs, prices tend to keep moving higher in the direction of the gap, offering a good buying opportunity for traders. In addition to the new price high, the key factor you need to watch for is trading volume. Volume should be at least two times heavier than average. If volume does not noticeably increase, it is probably a common gap. A breakaway gap can also occur to the downside if the price breaks to a new multi-week low on increased volume.
  
  

Common Gaps

• A common gap occurs when the price opens higher than the previous day's close. Common price gaps usually do not make new recent price highs. Likewise, trading volume is usually average or lower than average when a common gap occurs. Common gaps are usually filled quickly, which means the price will return to the previous day's closing price. Thus, when a common gap occurs, it offers an opportunity to sell short. Selling short is a method of selling stock you do not own, with the obligation to buy it back later. If you can buy it back more cheaply than you sold it, you profit from the difference.
  
  

Morning Pullback

• Sometimes a stock price will rise quickly at the start of the trading day. This usually occurs when there is a news-related event that is positive for the company's future prospects. Watch trading volume when this occurs. If it is noticeably higher than average, it means buying demand is strong. Inevitably, the price will stop for a rest and retrace some of its recent gains. If volume drops significantly during the price pullback, it can offer a buying opportunity as it is likely prices will continue higher once again.
  
  

Market on the Open

• Many traders research stocks overnight, looking for stocks that potentially offer good buying opportunities the following day. When you find a stock that looks like an attractive buy, it is tempting to place a market order to buy at the open. A market order is a type of order that is guaranteed to fill, but it fills at whatever price is available at the time. Placing a market-on-the-open order is usually a mistake as it can often cause you to buy at a price level that is significantly higher than a price that may be available later in the trading day.