Patterns: Price patterns dictate the likelihood of a gap being filled. Support and resistance isn’t left behind when a price moves up or down sharply.Price corrections: An overly optimistic or pessimistic initial spike may invite a correction.There are a range of factors that come into play with gap fill stocks: This usually means the price action, in the following days or weeks, retraces to the last day before a gap. What does it mean when a gap has been ‘filled’?Ī gap being ‘filled’ refers to the price returning to the original level before the gap happened. Therefore, experienced traders will be watching for the reversal and take the contrary position to the prior trend. This is often caused by a herd mentality of traders rushing to the trend and moving the stock into overbought territory. Exhaustion gaps are, conversely to continuation gaps, where price makes a final gap in the trend direction, but then reverses. Traders might look to follow the trend and place a stop just below the gap for a bullish runaway gap and just above for a bearish runaway gap.Ĥ. This can be caused by a news event that confirms the sentiment and furthers the trend. Continuation or runaway gaps show an acceleration of an already bullish or bearish pattern in the same direction. If a breakaway gap is accompanied by higher trading volume, it may be worth taking a position long for a breakaway gap up, and short for a breakaway gap down, on the candle following the gap. Breakway gaps signal a new trend where the asset ‘gaps away’ from the price pattern, as can be seen below where the gap triggers a breakout. Common gaps simply show a gap in price action independent of price patterns and usually don’t provide exciting trading opportunities.Ģ. The four types of gaps in tradingĪside from gap down and gap up, there are four main types of gap, dependent on where they show up on a chart: common gaps, breakway gaps, continuation or runaway gaps, and exhaustion gaps.ġ. A full gap down is when the opening price is lower than the prior low price, while a full gap up (as shown above) occurs when the opening price is greater than the prior high price. Gap down stocks and gap up stocks refer to the direction of the price movement either side of the gap. This is because they can move the market significantly between trading sessions in either direction. Other news such as product announcements, analyst upgrades and downgrades, and new senior appointments can lead to gaps. For example, in the chart above, ASOS stock rallied overnight as the company’s full year results showed it avoided another profit warning - along with traders showing confidence in the company’s ability to fix critical operational issues. Why does the gap occur? The most frequent cause is fundamental factors. This will appear as an asset’s price moves sharply up or down with nothing in between, meaning the market has opened at a different price to its prior close. What is a gap?Ī gap refers to the area on a chart where no trading activity has taken place. Read on to discover more about the phenomenon of gaps, the four types to be aware of, and how to employ a gap trading system. Gap trading strategies help traders capitalize on the gaps in charts caused by price fluctuations between sessions.
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