If you follow along with my trading videos, then you already know I’m a big fan of simple technical trading techniques.
Many traders believe that complex methods are better or have a better win/loss ratio.
But I’ll tell you from my many years of trading, this simply is not true…
In fact, my favorite technical trading pattern, the tail gap trading strategy, is one of the most profitable and reliable methods I have ever come across.
Let’s Revisit the Tail Gap Trading Strategy
For those who aren’t familiar with the tail gap trading strategy, check out this article. It goes into the rules and provides some examples of how to use this strategy.
I recommend you read the article linked above and familiarize yourself with this trading method.
In a nutshell, the tail gap trading strategy is based on simple trading principles such as trends, gaps and volatility, but it also provides everything necessary for consistent returns.
I know several people who only trade this strategy across different stocks, and they tell me it works great for them.
I’m going to review some past trades so you can see how the tail gap trading strategy works so you can get a good feel for it.
But the real reason why I want to go over this with you is because I’ve been getting several emails from traders who are learning this method and making similar mistakes.
I want to go over the most common mistakes so you can gain all of the benefits the tail gap trading strategy has to offer.
Make Sure You Follow the Main Trend
The first major problem I see people making with the tail gap trading strategy is taking signals against the main trend.
This is a big no-no, and I highly recommend you only take signals in the direction of the main trend.
The most profitable technical trading strategies require you to trade with the main trend, and this method is no exception.
Many traders also confuse the tail gap trading strategy with reversal strategies and go against the major trend.
This will most likely cause you unnecessary risk, so don’t do it.
You can see in the example below that the iShares Core US Aggregate Bond ETF (NYSEArca: AGG) is in a downtrend.
The entry signal should be avoided because the main trend is sloping down.
Only short signals should be taken in this case. And because it’s a long-entry signal, we’ll avoid it completely.
Cancel Your Order If It’s Not Filled the Next Day
The second biggest error that people make with the tail gap trading strategy is forgetting to cancel the entry order if a “no fill” takes place.
Remember, you only get one day after the setup to enter the trade.
If the trade doesn’t work out the day after the setup, the order has to be canceled.
The premise of the tail gap trading strategy is based on something happening in the market that causes a short, temporary deviation from the main trend.
Our goal is to catch the stock as the market corrects and comes back to its normal trading level within the trend.
This is supposed to happen fast, which is why I don’t give this trade too much time to work out.
Place Your Stop-Loss and Profit-Target Orders Every Time You Enter Trade
The last mistake I see traders repeatedly having trouble with is avoiding placing stop and profit target levels.
Statistically speaking, most people who don’t place stop-loss orders and profit targets at the time the order is placed avoid doing so.
Remember, the biggest reason for losses is caused by avoiding stop-loss orders at the time you enter the market.
Always write out your stop-loss and profit-target orders before you enter the trade.
This one piece of advice is important, and I hope you follow it each and every time you place an order.
The Conclusion
The tail gap trading strategy is one of my favorite technical trading methods because it offers great risk-to-reward characteristics, and it just makes sense.
When markets gap against the trend, it’s usually for a short period of time, and this strategy helps you capitalize on it.
Remember, great strategies don’t have to be complicated to be profitable.
For articles on similar topics please see: 1 Bollinger Bands Strategy Every Trader Needs to Know and How to Use the Exponential Moving Average for Profitable Swing Trading.
All the best,
Roger Scott
Senior Strategist, WealthPress
