Gaps can be defined as the areas on a chart whereby prices of stocks move in a sharp manner either up or down, whereby there is very little or no trading that happens. What happens after that is the chart of the assets usually shows a gap in the normal pattern of the prices. In this article, you will find information that will help you know the reason why gaps occur as well as how they do that and also how to make some profitable trades using them. There are different factors that make gaps to occur. One of the things that may make the stock market of a company to gap up is if it earns more than what was expected. The reason why the gap happens is because the price of the stock may have opened higher as compared to how it might have closed the previous day.
There are four ways in which gaps can be classified. The breakaway gaps usually happen at the end of a price pattern and it indicates the start of a new trend. There are also the exhaustion gaps that happen almost at the end of a price pattern and they show the last trial for hitting highs or lows. It is not possible to place the common gaps in a price pattern and hence they are simply used to represent areas that have some price gaps. The last classification of gaps in the continuous gaps which are also referred to as the runaway gaps which usually occur when the price pattern is in the middle. The continuation gaps are used to show some rushing of sellers and buyers who have the same kind of belief in the future direction of the stocks.
Filling the gap basically means moving the prices to the initial pre-gap level. Fading is the term used to describe the situation whereby gaps are filled on the same day that they have occurred. You can have a lot of ways that you can take advantage of the gaps although some of the strategies are well-known than the others. There are some traders who may prefer buying when there are some factors that are favoring the gap on the following day’s trading. Such traders will hence buy a stock sometimes after there has been a positive report on earnings as they hope for a gap up to happen the next day.
There are also some traders who sell or buy when the price movement is in the initial stages of the movement of prices as they hope that there will be a good fill and that the trend will continue. Such traders may for example purchase a currency during the time when it is gaping up in a fast manner on a low liquidity and when the overheads have no resistance. There are some other traders who might fill the gap in the opposite direction after they have learned about a high or low point.