Exploiting Gaps in Trading
When the capital market is volatile, sometimes the chart displays a phenomenon called trading gaps. Gap trading is where one candlestick suddenly creates distance from the next candlestick.
The gap that occurs on the trading chart indicates that no transactions were executed at that price level. This is because prices have changed drastically in a short period of time. Both a price spike and a drastic price correction will trigger a gap in the trader's trading chart. This common phenomenon is called a 'gap up' if the spike flies to the moon or 'gap down' if the correction shrinks into the abyss.
One of the most popular ways is to place a bid before the market opens after seeing a signal of a gap. This strategy must be followed by a qualified fundamental and technical analysis so that the trader's predictions do not go wrong. This is because gaps often occur after financial reports are released to the public, traders often buy stocks or currencies when the new market closes at favorable numbers. Traders can also choose to place prices in liquid or illiquid positions at the beginning of price movements assuming the gap will be filled soon. Because usually, when the gap starts to fill, the trend will continue at a new equilibrium.
Several types of gaps indicate new momentum in the trading trend. For example, a breakaway gap will typically be followed by a sharp increase in trading volume. However, this is not the case with runaway gaps, which often occur for no particular reason.
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