What Is a Gap?
-When a stock ends the day at a certain level and then starts at a new level even though no trades took place.
-Gaps are usually from one day to the next.
-The reason is that something within the company or industry can change: earnings report, etc.
-Weekly charts can also have gaps, but that usually happens over the weekend and it isn't as common.
4 Types of Gaps:
Likely caused by low trading volume.
It will usually be filled (prices slowly revert to that gap).
-More meaningful than common gaps
-They can happen in the middle of the trading day
-They have a downward momentum
-Suddenly the stock dips down below the support line. The gap is between the support line and the dip down. This is due to a change in psychology, and people start to sell their shares.
-Make sure you see an increase in volume at the gap point. That is confirmation of the downward move.
-Another way to be sure that the breakaway gap is a healthy gap is if it happens with another pattern (e.g. a descending triangle pattern).
-Similar to the breakaway gap
-Instead of going to the down side it is going to the up side
-It is basically a stock price jumping up to a new level (typically due to product releases, news events, etc)
-Anything that creates positive sentiment creates a runaway gap
-There are three possibilities it can go through:
1. Downard trend and back up, hops and continues to go up
2. Upward incline, gap to incline
3. Downward trend to a slingshot upward
-Runaway gaps are more powerful when they come out of an ascending triangle or trend line.
-Very good to trade with, if you watch them
-They can be dangerous if you are new to the stock market or are not spotting them correctly
-They happen when a stock shoots up, jumps and continues to trend up, but will eventually decline
-This can happen with a decline as well (declines, jumps down, continues to decline and then shoots up)
-You want to be cautious with these gaps because they typically happen in a state of panic
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If I enter a positional trade which I plan to hold for 3 months or more, When I execute the trade with a bracket order or with a trailing stop loss, will I be covering my risk against any major gap up or gap down?
+Sasha Evdakov (TradersFly) Thank you for the quick reply! Loved the video! The price and volume indicators any in specific i.e. Bollinger Bands. Also around what time frames are best for gaps charts of 1 min, 5 min, 1 hour, Daily?
So gaps occur due to extremes in trading volume? So if I understand this correctly, Common- low trading volume (so trend line dissapears because there isnt enough trade volume to create a line.. but once that picks up again and reaches a threshold of some sort, the line reappears at the higher stock price?), Breakthrough, runway and exhaustion- high trading volumes as traders typically fall into the psychology of FOMO(fear of missing out) and try jump on/off board, causing the line to accelerate, reaching another volume threshold that causes the line to dissapear? And Exhaustion gap is just a runaway gap that occurs on the back of a supernova trend?
Please correct me if I am wrong, I'm just trying to internalise this for my own learning :) Sincerely thank you in advance!
If a stock rises in a morning spike then consolidates for the rest of the day, until market close, then gaps up in pre market. Would you still consider that an over extended chart, therefore being an exhaustion gap? Or does the consolidation decrease the chances of a morning panic occurring? Thank you Sasha
Ok then. If the consolidation before close, up ticked with increased volume, then closed and gaped up in pre market the next day. Would you be very cautious, or would you consider that a buy? Or wait for a bounce or pullback and make a move on that?
Sorry to be a pain in the ass.
Do stocks gap up because trading before market opens? And gap down because traders dump their positions after market closes or before market opens? I understand why gaps occur (news, press release, earning reports), but I still don’t understand the science behind it. Also, what does it mean to fill the gap?
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