What is a ‘Gap’
A gap is a break between prices on a chart that occurs when the price of a stock makes a sharp move up or down with no trading occurring in between. Gaps can be created by factors such as regular buying or selling pressure, earnings announcements, a change in an analyst’s outlook or any other type of news release.
An example of two different gaps can be seen in the chart above. Notice how the stock closes the trading session before the first gap at $50 and opens the next trading day near $46 with no trading occurring between the two prices.
Types of Gaps
Gaps most commonly occur at the open of major exchanges. Opening gaps are a manifestation of an imbalance in supply and demand at the market opening in a particular security created during the overnight as a result of a newsworthy event that has an effect on a securities price. Savvy day traders exploit these gaps in an attempt to capture quick profits from the price corrections that take place as sellers and buyers struggle to find a new equilibrium price. Gaps that form in the intraday market are usually a result of an important economic announcement.
Trading Strategies for Gap Trading
Many shrewd traders use gaps as setups for trade entry decisions. A general rule of thumb for trading gaps in the same direction of the minor trend and accompanied by strong volume is to take a position in the direction of the minor trend. For gaps that occur in the opposite direction of the minor trend, traders take a position contrary to the minor trend with a very tight stop-loss. Taking small quick profits with minimal risk is characteristic of gap trading strategies.
What to do when there’s a gap in your stock portfolio
When the stock market is volatile, it’s not unusual to see gaps in your portfolio. A gap is a period of time when there’s a sharp drop or increase in prices. Gaps can be caused by a number of factors, including economic news, earnings announcements, and even rumors. Regardless of the cause, it’s important to take a disciplined approach to dealing with gaps. The first step is to resist the urge to panic. It can be tempting to sell stocks when prices are falling, but this is often the worst thing you can do. Instead, take a deep breath and remember that volatility is normal in the stock market. Then, take a close look at your portfolio and determine which stocks are most likely to rebound. Finally, don’t forget to rebalance your portfolio on a regular basis. By following these simple steps, you can help minimize the impact of gaps on your investment returns.
When to buy and sell stocks to stay ahead of the curve
There’s no surefire way to always make money in the stock market. However, by paying attention to stock prices and understanding the concept of a “gap,” you can put yourself in a good position to buy stocks when they’re undervalued and sell them when they’re overvalued.
A “gap” is simply a difference between the price at which a stock trades on one day and the price it trades at the next. For example, let’s say that a particular stock trades at $10 on Monday and $12 on Tuesday. That would be considered a $2 gap. Gaps can occur for a variety of reasons, including changes in earnings reports, analyst predictions, or overall market conditions.
Generally speaking, you want to buy stocks when there’s a small gap (under $2) and sell them when there’s a large gap (over $2). Of course, it’s not always that simple. You also need to take into account things like the overall trend of the market and the specific conditions of the company you’re buying or selling stock in. However, Gap trading is a good general strategy to use when you’re trying to stay ahead of the curve in the stock market.