Getting to know the Trading Gap
Definition of Gap
Gap is an empty gap in the price chart that arises due to a price spike that occurs due to no transactions at the beginning of the trade opening. So a gap occurs when the price opens above or below the previous day's close without trading activity in between.
Trading Type
Because the gap is a gap in the chart, it can occur in an up or down condition, for a gap that occurs in an uptrend it is called a gap up. Gap up is when there is a price spike at the opening leaving the highest price from the previous day. While gup down is the opposite of gap up. The gap up indicates that there is high buying interest and the gap down indicates that there is strong selling pressure.
Types of Gaps
There are different types of gaps, depending on the size of the gap and where it occurs. Each of these types of gaps can be full or partial gaps. The types of gaps are common gaps, breakaway gaps, runaway gaps, and exhaustion gaps.
Common Gaps
Common gaps are a type of gap that occurs frequently, has little significance, and is less important when the opening price differs slightly from the previous closing price. The lack of significant price movement at the gap, or after, indicates that this gap is common.
Breakaway Gaps
Breakaway gaps occur when the price moves very significantly above the resistance area or below the support area. Breakaway gaps can also occur after the price is able to break out of a narrow trading range or when it moves out of the chart pattern. Breakaway gaps indicate the start of a strong trend movement, usually a large one, and price tends to follow the direction of the gap over the next several weeks.
Runaway Gaps
Runaway gaps are gaps that occur within a strong trend and indicate that the trend is still strong enough to cause a gap in the direction of the trend. Basically, this gap is a gap that occurs in the middle of a trend because the trend is actually increasing. Runaway gaps usually have a large range and price tends to follow it, moving towards the gap over the next few weeks.
Exhaustion Gaps
Exhaustion gaps occur at the end of the trend. This exhaustion gap is usually caused by people who got lost, who entered at the end of the trend, after regretting not having entered earlier. So this gap occurs because the price has moved at the end of the trend, then when many people take profit, and the price starts to fall, people who enter at the end of the trend also join to sell, and finally the selling pressure is too high causing a gap.
Gap and Stop
A trader in the case of a gap down may have to place a lower stop loss, far below the planned stop loss level due to a gap (down). As a trader, you can reduce the risk of gaps by not trading directly before the company issues news announcements that may have a material impact on stock prices. During periods of high volatility, reducing your position size can help minimize losses caused by gaps. However, traders may also need to make a cut loss at the last price, when the market is falling very deep and has the potential to resume, and can buy back after there is a good signal to buy. A trader in a short position can also be caught in a gap, and will result in a larger loss than expected.
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