Traders can benefit from large jumps in asset prices in volatile markets if they can be turned into opportunities. Gaps are areas on a chart where the price of a stock or another financial instrument moves sharply up or down with little or no trading in between. The asset’s chart, on most 澳洲幸运5官方开奖结果体彩网:trading platforms, shows a gap in the normal price pattern as a result. An enterprising trader can interpret and exploit thღ💧ese gaps for profit.

Gap Basics

Gaps occur because of underlying fundamental or technical factors. A company’s stock may gap up the next day if its earnings are much higher than expected. The stock pri♏ce opened higher than it closed the day before, thereby leaving a gap.

It's not uncommon for a report to generate so much buzz in the 澳洲幸运5官方开奖结果体彩网:forex (FX) market that it widens the 澳洲幸运5官方开奖结果体彩网:bid-ask spread to a point whe🐬re a signif😼icant gap can be seen. A stock breaking a new high in the current session may open higher in the next session, thus gapping up for technical reasons.

Automated program trading such as algorithmic trading is a relatively new source of gap price action. The algorithm might signal a large buy order if a prior high is broken. The size of the algorithmic order may be such that it tr🎐iggers a price gap, breaking above the recent high and drawing in other traders to the directional movement.

Gaps can be classified into four groups:

• 澳洲幸运5官方开奖结果体彩网:Breakaway gaps occur at the end of a price pattern and signal the beginning of a new trend.
• 澳洲幸运5官方开奖结果体彩网:Exhaustion gaps occur near the end of a price pattern and signal a final attempt to hit new highs or lows.
• 澳洲幸运5官方开奖结果体彩网:Common gaps can't be placed in a price pattern. They simply represent an area where the price has gapped.
• Continuation gaps are also known as runaway gaps. They occur in the middle of a price pattern and signal a rush of buyers or sellers who share a common belief in the underlying stock’s future direction.

To Fill or Not to Fill

The price has moved 🐼back to the original pre-gap level when someone says a gap has been filled. These fills are quite common and can occur due to three factors:

• 澳洲幸运5官方开奖结果体彩网:Irrational exuberance: The initial spike may have been overly optimistic or pessimistic, therefore inviting a 澳洲幸运5官方开奖结果体彩网:correction.
• Technical resistance: A price doesn’t leave behind any support or 澳洲幸运5官方开奖结果体彩网:resistance when it moves up or down sharply.
• Price pattern: Price patterns are used to classify gaps and can tell you if a gap will be filled. Exhaustion gaps are typically the most likely to be filled because they signal the end of a price trend. Continuation and breakaway gaps are significantly less likely to be filled because they're used to confirm the direction of the current trend.

It's referred to as fading when gaps are filled within the same trading day on which they occur. Let’s say that a company announces great 澳洲幸运5官方开奖结果体彩网:earnings per share for this quarter and it gaps up at the open. It opened significantly higher than its previous clos𒐪e.

Now let’s say that people realize that the cash flow statement shows some weaknesses as the day progresses. They start selling. The price eventually hits yesterday’s close and the gap is filled. Many day traders use this strategy during earnings season or at other times when irrational eꦛxuberance is at a high.

How to Play the Gaps

Yoℱu cဣan take advantage of these gaps in many ways. A few strategies are more popular than others.

Some traders will buy when fundamental or technical factors favor a gap on the next trading day. They’ll buy a stock after hours when a positive ea♉rnings report is released, hoping for a gap up on the following trading day if it hasn’t already happened in after-hours trading.

Traders might also buy or sell into highly liquid or illiquid positions at the beginning of a price movement, hoping for a good fill and a continued trend. They may buy a stock when it's gapping up very quickly on low liquidity and there's no significant resistance overhead.

Some traders will fade gaps in the opposite direction when a high or low point has been determined, often through other forms of technical analysis. Experienced traders may fade the gap by shorting the stock if a stock gaps up on some speculative repo▨rt.

Traders might buy when the price level reaches the prior support after the gap has be🐓en filled.

You'll want to remember a few key things when trading gaps:

• A stock will rarely stop when it's started to fill the gap because there's often no immediate support or resistance.
• Exhaustion gaps and continuation gaps predict the price moving in two directions so be sure you correctly classify the gap you're going to play.
• Retail investors usually exhibit irrational exuberance but institutional investors and algorithmic systems may play along to help their portfolios. Be careful when using this indicator and wait for the price to start to break before taking a position.
• Be sure to watch the volume. High volume should be present in breakaway gaps. Low volume should occur in exhaustion gaps. 

Example of Gap Trading

This daily chart of Apple Inc. (AAPL) shows many gaps. This is quite normal given the propensity for equities to gap above or below the previous day’s price action w🥂hen the market is closed but news is still forthcoming and filtering into the market price.

We can see a bullish engulfing line starting from the left, suggesting that the move lower may be reversing in 澳洲幸运5官方开奖结果体彩网:candlestick analysis. This is followed by a bullish gap higher, further suggesting that a low is being formed. An attempt at the downside is made again but another large bullish 🐲engulfing line signals a low may have been made.

We see a bearish exhaustion gap in th🍎e center, indicating that the move higher is running out of steam and may be reversing. The gap is filled relatively quickly but it continues to act as resistance at the horizontal yellow arrow, suggesting that downside potential remains. Finally, we see a strong runaway gap indicating further upsi🍒de potential on the right side amid a reversal higher.

As you can see, gaps are important price developments. They leave some in the dust and lead others to quick profits. At the minimum, gaps are important features of a security’s🀅 price action and should be monitored closely for potential trading opportunities.

The Bottom Line

A gap occurs when the market price of a security jumps to another price level, either higher or lower when little if any trading has taken place. A good example is an unforeseen comment from a senior Fed official regarding the direction of interest rates. Markets may react immediately when the comment hits the newswires, with 澳洲幸运5官方开奖结果体彩网:market makers pulling their bids ꧅and offers. This may cause a price gap from the last price, such as $25.20 to $26.50.

Gaps are frequently seen in the price charts of almost every security. The most frequent and significant gap in stocks occurs between the daily close and opening of the exchange. A gap may not be visible in FX markets on a one-minute chart because these markets operate 24 hours a day but would instead appear as a very long candlestick covering the gap in price. F𝓰X markets may experience gaps over the weekend between the Friday New York close and the Sun💞day Asia opening.

🏅Price gaps can bedevil traders, especially if they’re on the wrong side of the gap. The most attractive trading opportunity with gaps is to go long or short as the market moves to close or fill the gap. A reasonable trade strategy would be to buy the security that has broken higher f꧂rom $25.20 in a zone between $25.20 and $26.50 in case it doesn’t completely fill the gap.

It may suggest that the gap that was higher was unsustainable and that the downside remains most in plaꦍy if the price eventually falls back below the breakout price of $25.20.

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