Have you ever noticed a gap between a stock's closing and starting prices without trade? If the answer is yes, you were likely unaware that the name of gapping knows this market occurrence. This article will discuss the causes of stock price gaps, different sorts of gaps, and what "gap up" in stock trading means.
Why Do Stock Prices Differ?
Gaps happen when a stock's opening price and closing price diverge. Although we'll concentrate on stock gaps, they can occur in any financial market. A gap typically appears when there needs to be more buyers and sellers to prevent unexpected declines and spikes in price. This is known as low market liquidity.
Even markets with a massive volume of activity, like the forex market, are susceptible to this. After a trading day concludes and the market opens the next day, gaps are frequently seen in the stock market. Important occurrences like earnings announcements and corporate news can affect market sentiment after the stock closes, causing gaps in the price.
TYPES OF GAPS
Not all gaps are the same, depending on the state of the market. Here is a list of the most typical gaps:
Breakaway gap: A breakaway gap, which typically appears at the peak of an uptrend and the bottom of a downtrend, indicates that the trend may be about to reverse. It may also develop during the breakouts of significant chart patterns, and their intensity may be increased by high trading volume.
Continuation Gaps: Gaps in the trend's direction can appear in the middle of powerful uptrends or downtrends. They indicate the presence of significant buying pressure during uptrends or intense selling pressure during downtrends.
Common gap: As their name implies, these are the market's most prevalent gaps. They usually take place when a new trading day begins in the stock market or after the weekend trading halt in the forex market. However, they can also happen in times of intense buying or selling pressure in the middle of the trading day.
Exhaustion gap: Exhaustion gaps appear during intense uptrends or downtrends, although they move counterclockwise to the underlying trend. They indicate that the trend is beginning to slow down and that a potential reversal may be on the horizon.
Filled Gap: When a gap develops between the closing and opening prices, markets frequently close it. This is especially true for frequent intervals, and a trading strategy can be developed around them.
Playing the Gap
Traders can develop a trading strategy and attempt to benefit from gaps based on emerging gaps. You can generate successful trading chances if you know how to trade a gap up or down. Here are some things traders should keep in mind when dealing with gaps as a general rule:
Since the market frequently fills gaps shortly after they develop, common gaps should be traded oppositely.
After a continuation gap emerges, since it indicates a solid and healthy underlying trend, traders can try to enter that direction.
FINAL INSIGHT
An easy and disciplined way to sell and buy stocks is through gap trading. First, to find stocks with a price gap from the previous close, one looks for them. Then, one watches the first hour of trading to determine the trading range. An increase above that range denotes a buy, while a decrease below it indicates a short.
Moving forward, in my next article, I will be discussing paper trade. It is the simplest method for successfully determining your ability to trade gaps. Paper trading does not involve any actual transaction.
