A gap is a term used in capital markets to refer to discontinuation in a price graph due to changes in market fundamentals after the market closes. A gap is when the asset's price rises or falls significantly from its previous closing, without any trades taking place between. This can be caused by significant market news that influences investors' sentiment positively or negatively, such as earnings calls after-hours.
While gaps are common, not all are equally important. Expert traders know what gaps to be aware of and which ones to ignore. There are four main types of gaps in stock exchange. These are the types you will find.
While gaps are easy to see, it can be difficult to determine their importance and interpret them. This requires practice and knowledge. These are the types of gaps you will find in a price range.
Common gaps can also be called trading gap or area gaps. These gaps are usually caused by market forces and do not require any special events. These are non-eventful occurrences, as the name implies. These also fill up quickly, so the market retraces after a few weeks or days to its original level.
A common gap is a non-linear jump from one point to another in a price chart.
How do you find a common gap in the market? These gaps are often smaller and can't be caused by market news. Common gaps fill up quickly.
This happens when the price attempts to move out of the congestion area. Understanding what congestion area means will help us understand breakaway gaps better. The price range where trading takes place for a long time is called the congestion area. When approached from below, the highest point of congestion is often called the resistance. The support level is the lowest point in the congestion when approached from above. Breakaway gaps occur when the market moves beyond the resistance or support barrier. To cause a change in trend, it takes market enthusiasm. This means that there are not enough buyers to support upward movement, or too few sellers to support the downtrend swing.
Volume should increase when a breakaway gap is observed. This is preferably after the gap has closed in the opposite direction. The market breaks out creates a new support level. The new resistance level is set where the trend goes downward. Breakaway gaps are usually more difficult to fill than common gaps.
When it is associated with the classic price chart, a breakaway gap can be very good.
It can occur in either an uptrend or downtrend. Runaway gaps are usually a sign of a sudden shift in traders' perceptions or interest in a stock. This is often accompanied by a spike in buying or selling.
A runaway gap is a sign that traders are changing their interest in the stock when it is associated with an uptrend. Trader who may have missed the uptrend before might go on a mad buying spree when they realize that there might not be a retracement. This causes the price and trade volume to rise suddenly and dramatically.
A runaway gap in a downtrend can also be a sign of excessive liquidity in the market. This could lead to a downward spiral. The stock price could fall if the seller panics and decides to sell the stocks.
To determine how long a trend will last, traders use the concept of measuring the gap. This usually occurs in the middle or last part of a trend.
It occurs when there is a change in trend, as the name implies. This is usually associated with a rise of price and an increase in volume. Sometimes exhaustion gaps can be confused with runaway gaps. Trader compare quantity and price to distinguish the difference. An exhaustion gap is when both volume and price increase.
Below is the chart. The exhaustion gap is the result of the price increase being accompanied by an increased volume.
Trades should be efficient if traders can correctly identify and interpret gaps. They are not always easy to spot, even though they are common on daily trade charts. Filling is an important concept associated with gaps. It's a concept that allows the market to adjust to the price level, nullifying any sudden changes caused by the gap.
Failure to recognize a gap and not reacting to it can cause one to miss an exit or entry opportunity in a market. This could impact on the profit or loss of a trade.