How to play the market gap ups and gap downs Gaps are the space between the open and the closing prices of two consecutive days and such gaps normally get filled.
One of the common terms you must have in markets quite often is a gap up or a gap down. Gaps are the space between the open and the closing prices of two consecutive days and such gaps normally get filled. Hence it is an important indicator to the trader in identifying the trading opportunities on the stock. To be precise, a gap is essentially a change in prices levels between the close and the open of two consecutive days. Here we are referring to two consecutive trading days. Gap analysis is retrospective in nature as it requires confirmation that is only available after the price movement actually manifests itself. For example, there are different types of gaps like common gap, breakaway gap, continuation gap and exhaustion gap, but all these gaps are evident only after the price impact is visible on these stocks. Gap ups and gap downs are with reference to two consecutive day’s price levels. It focuses more on prices and does not look at volumes. Let us look at two such very specific types of gaps. For example, a full gap up occurs when the next day opening price is higher than the high price of the previous day. Check the chart below, where the green arrow depicts the gap up point.
Lastly, the Continuation gap occurs in the middle of a stock’s price pattern and indicates a common belief of a group of buyers or sellers on where the stock is headed. Since gaps are retrospective, this continuation gap is useful for traders who want to enter only after full confirmation.Gaps emphasize one of the three; the beginning of a trend, conclusion of a trend or the perpetuation of a trend. Here is how you can actually apply the analysis of gaps to your trading strategy in the stock markets.Gaps are deep pits or high ceilings which have to be filled. It is an area where there is no support or resistance. Once a stock starts to fill a gap, it will not stop and your strategy needs to be set accordingly.We saw four different gap patterns and you need to frame your strategy based on your interpretation of the gap. The continuation gap indicates perpetuation of a trend while the exhaustion gap shows the tiring of a trend.Normally, breakaway gaps and exhaustion can be confusing and give mixed signals. The answer is to look at volumes. High volumes accompany a breakaway gap while low or thinning volume occurs in an exhaustion gap.Many gaps can be misleading and some of them can be too short lived. Wait for the gap to manifest some degree of confirmation before trading it. It is OK to miss the full trend manifestation but it is important to wait for confirmation.
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