What is a Stock Gap?

Check out Market Rebellion’s Rebel Hub for the biggest stories on market-moving events, how-to trading guides, and the latest in Unusual Option Activity from Jon and Pete Najarian. The next chart for Earthlink (ELNK) depicts the partial gap up on June 1 (red arrow) and the full gap up on June 2 (green arrow). I’m a trader, but I don’t give financial advice and this site is not financial advice. You should consult a financial professional before making any financial decisions. This implies at least a slight tendency for gaps to fill, without it being a hard rule that gaps need to be filled. As you see in the statistics above with the Nasdaq QQQ ETF, market gaps down fill more often than market gaps up.

1. Of course, it’s important to ensure that the stock is still in an uptrend or downtrend before taking any action.
2. A stock price gap on very high volume like the one below means that strong institutional buying of the stock could send prices higher in the weeks and months to come.
3. A gap up happens when a stock opens above the top of the previous candlestick.
4. Trading volume is an important factor to consider when trading gap fill stocks.
5. A congestion area is a price range in which the market has traded for some time, usually a few weeks or so.

However, many investors have successfully achieved strong returns due to investing in gap-fill stocks. Gaps can also be created by earnings announcements, news events, or other catalysts that drives a stock’s price higher or lower. Of course we would all like to know when a stock is going to gap higher so that we can buy it right? But it’s what happens after the gap that actually can be very useful for you as a trader. The second, bigger, issue is that we are entering right on the open price.

Some gap trading strategies work for a long period of time, then take a breather, before they resume working again. Sometimes, the futures market will have runaway gaps caused by trading limits imposed by the exchanges. Getting caught on the wrong side of the trend https://bigbostrade.com/ when you have these limit moves in futures can be horrifying. The good news is that you can also be on the right side of the trend. A common gap usually appears in a trading range or congestion area, reinforcing the apparent lack of interest in the stock.

Stock Gaps: Discover the 9 Main Types & How to Pounce on Them

If a company releases an unexpected positive news bulletin, this might not only lead to a gap up but also an extended move up that lasts for several days. The type of gap that you could benefit from will largely depend on your financial situation and investment goals. But make sure you also understand why the stock price change is happening and whether it can lead to an eventual reversal. They’re identified by high volume and a large price difference between the previous day’s close and the new opening price. They can easily be mistaken for runaway gaps if you overlook the exceptionally high volume.

If a stock price reverts to its previous position before the gap, but continues to increase, this could indicate a strong bullish status. Traders might interpret this as a signal to continue holding or even adding to their positions. After the stock price jumped, it lost momentum, as bulls might have suspected that price was overvalued.

This happens when there is a significant news event or market reaction that occurs after trading hours. The gap can create an opportunity for traders to profit from the price movement that occurs when the market opens. Aside from earnings reports and news events, gap fills might also occur due to technical reasons. For example, a stock might experience a gap fill as it encounters relevant support or resistance levels that impact its future price. Runaway gaps are best described as gaps caused by increased interest in the stock.

Across our 20 fill the gap stocks the average annualized return (1-minute data) was only 2% and the average CAR/MDD only 0.20. Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.

End-of-Day Gap Trading

Recognizing and understanding the different types of gaps can be an invaluable asset for traders at all levels. Each type signifies different market conditions, with implications for strategy and risk management. Another important aspect of technical analysis is the study of chart patterns and trend lines. Chart patterns are visual representations of historical price action that often suggest the future direction of stock prices.

How to know if a stock will gap up?

Understanding where these levels are can help investors identify when to buy or sell for optimal gains. A wide gap with high trading volume is more likely to fill than a narrow gap with low trading volume. With careful analysis and execution, this approach could help you maximize your profits in the stock market.

Gaps do eventually fill but that could happen after a strong move or trend takes place and can take a long time for the market to change direction. Using technical and fundamental analysis is the required method to identify the type of gap, as correctly identifying the gap is the best way to attain success. How the gap will affect the price and whether the gap will fill depends entirely on the gap category. To take advantage of a gap in the pricing of a stock, it is imperative that you correctly identify the gap and apply the appropriate trading strategy suited for it. The concept is surprisingly simple but executing this strategy is a whole other thing.

Traders often analyze the size, volume, and location of the gap within the price chart to determine its significance and potential implications for future price movements. Gaps in a stock chart occur when the price of a stock moves suddenly up or down, usually in response to news outside of market hours. In some cases, these gaps don’t last – rather, they’re “filled” as trading action brings the price back towards the previous close.

Gap Fill Statistics Table – Down Gaps, Filled Same Day (QQQ)

It also assures traders who hold positions on the right end of the gap that the security has moved into a new cycle. Once market confidence starts to move the security out of the band, a breakaway gap is created. A gap is a large change in the value of a financial instrument with no major buying or selling activity in between. On the technical side, gaps can ensue following the break of a prior high/low, or other form of technical resistance or support, such as a key trend line. Gaps can be caused by several factors, but they are mostly seen as a result of unexpected news or a technical breach of support or resistance. Starting from the left, we can see a bullish engulfing line, suggesting the move lower may be reversing (candlestick analysis).

In the chart below, note the significant increase in volume during and after the runaway gap. Price movements of an asset indicate to traders when it might be a time to buy, sell, or ignore what is happening in the market. Gaps, such as stock gaps, are large jumps in a security’s price during non-trading hours due to external factors, such as news. When evaluating the gap, traders and investors need to determine the cause before taking any action.

Gapping occurs when the price of a security or asset opens well above or below the previous day’s close with no trading activity in between. Partial gapping occurs when the opening price is higher or lower than the previous trading webinar day’s close but within the previous day’s price range. Full gapping occurs when the opening is outside of the previous day’s range. Gapping, especially a full gap, shows a strong shift in sentiment that occurred overnight.

Categorised in: Forex Trading

This post was written by James Habib