Online Investing

 Understanding the Concept of Gap Trading

WHAT IS A GAP?

A gap indicates the area on a chart that does not have any trading activity. It appears as an asset’s price that registers a sharp upward or downward movement which has nothing in between. It implies that the market has opened at another rate than its last close. Visit MultiBank Group

Why does the gap exist? A common cause is the fundamental factors. News like product announcements, analyst upgrades as well as downgrades as well as new senior appointments may cause gaps. It happens because the markets could move significantly between trading sessions in any of the two directions.

FOUR TYPES OF GAPS IN TRADING

Besides the gap down and gap up, there are four key types of gaps, which depend on where they are located on a chart: common gaps, breakaway gaps, continuation or runaway gaps, and exhaustion gaps.

  1. Common gapsindicate a gap in price action that is independent of price patterns and it typically doesn’t offer any exciting trading opportunities.
  1. Breakaway gaps indicate the presence of a new trend in which the asset ‘gaps away’ from the price pattern, to where the gap leads to a breakout. If a breakaway gap comes with a higher trading volume, it could be worth taking a long position for a breakaway gap up as well as a short for a breakaway gap down, on the candle following the gap.
  1. Continuation or runaway gaps depict an acceleration of an already bullish or bearish pattern in the same direction. This could happen because of a news event which reiterates the sentiment and continues the trend. Traders may choose to follow the trend and have a stop order in place right under the gap for a bullish runaway gap and right above for a bearish runaway gap.
  1. Exhaustion gapsare the opposite of continuation gaps, where price makes a final gap in the direction of the trend only to reverse later. It is typically caused by a herd mentality of traders that rush to the trend and move the stock right into overbought territory. Hence, seasoned traders may watch the reversal and take up contrary positions before the trend.

WHAT DOES IT MEAN WHEN A GAP HAS BEEN ‘FILLED’?

When we say a gap is being ‘filled’, it implies that it is going back to the price which was at the original level right before the gap occurred. It generally implies that the price action changes its course in the following days or weeks only to retrace to the last day before a gap. Know more مجموعة ملتي بانك

There are a variety of different factors which come into play with gap-fill stocks:

  • Price corrections: An initial spike that appears highly optimistic or pessimistic might lead to a correction.
  • Support and resistance are not left behind when a price increases or decreases sharply.
  • Patterns: Price patterns direct the possibility of a gap being filled. For instance, price reversals that witness exhaustion gaps have better chances of being filled since this kind of gap signal indicates the end of a price trend.

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