Gap Trading

Gap trading is a form of technical analysis used by day traders and other types of traders as well in order to trade stocks or other financial securities. Investors must learn how to read stock charts as part of their trading education. Gaps are actually areas on a chart where the price of a stock moves abruptly up or down with little to no trading in between. The key is to learn to interpret these gaps in a way that brings profits.

We see gaps occur as a result of fundamental factors such as when a company’s corporate earnings are higher than expected and their stock therefore gaps the following day. What this means is that the stock actually opened higher than it closed the previous day, hence leaving a gap. Additionally, you see gaps occur in the market as a stock breaks into a new high in a trading session.

Gaps are classified into four groups and short-term stock investors study these gaps as they learn gap trading.

Breakaway gaps – used in technical analysis, breakaway gaps represent gaps in the movement of a stock price that is supported by levels of high volume. They occur at the end of a price pattern and they signal that a new trend is beginning.

Exhaustion gaps – these gaps occur after a rapid rise in a stock’s price begins to tail off. It typically represents a falling demand for a specific stock and it occurs near the end of a price pattern. The exhaustion gap signals a final attempt to hit new lows or new highs.

Common gaps – common gaps are found on a price chart for an asset and they occur as a result of normal market forces that are very common. Visually they are represented by a non-linear jump or a drop from one point on a stock chart to another point. Common gaps cannot be placed in a price pattern, when gap trading and they represent an area where the price has “gapped.”

Continuation gaps – continuation gaps occur in the middle of a price pattern. These gaps signal buyers and sellers who share a common belief in the future direction of the underlying stock.

In addition to gap trading, please also read about Japanese Candlesticks which is a trading strategy used by some of the world’s most successful traders along with other forms of technical analysis. Candlestick signals, used in conjunction with the appearance of a gap, provide high-probability profitable trade set-ups. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns . Combine these with your favorite technical indicators , such as the moving average , and you have the perfect trading arsenal for trading stocks , currencies, commodities, or exchange traded funds .