Gapping
Candlefocus EditorCommon Gaps are the most frequent type of gap and tend to occur within regular trading hours. These gaps are typically partial gaps, which means that some trading activity between the previous day’s closing price and the next day’s opening price has taken place. Common gaps can form out of any kind of trading activity, from news related to a given security or the overall markets to large buy or sell orders. Common gaps are usually a small-scale event, and they tend to provide relatively little real analytical insight compared to other types of gaps.
Breakaway gaps, which mark the beginning of a trend or an extended price move, occur when the opening price is much further away from the previous day’s closing price. This type of gap typically occurs when there is a strong catalyst such as a large corporate news announcement or significant macroeconomic news that drives the market price higher with no significant trading in between. This type of gap confirms the start of a new trend and suggests further potential price movements in that direction.
Runaway gaps, on the other hand, signify the continuation of an already existing price trend. These types of gaps tend to form when a security’s price is already in a strong uptrend and there is an extreme degree of bullishness or optimism in the market. These gaps happen when the opening price is much further away from the previous day’s close than expected. They can provide traders with an opportunity to participate in this upward momentum and potentially enter long positions.
Finally, exhaustion gaps are gaps that tend to mark the end of a strong price move and signal a reversal in the trend. These are generally full gaps and tend to occur after a long and sustained price rally. This type of gap usually occurs when the markets have become saturated by buyers and there is no one left to keep buying, which causes the price to abruptly fall to a new level. Once this gap forms, traders may use it as an indication to take profits and to position themselves for the possible reversal of the trend.
In conclusion, gapping is an important phenomenon for traders and investors to understand, as it can provide certain signals about potential price movements. By paying attention to different types of gaps and what catalysts may have caused them, traders can gain valuable insight into the markets and make better decisions about their trading strategies.