Gaps in trading

Understand trading
Gaps in trading

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In trading, gaps correspond to the price difference between the close of a trading session and the opening session that follows, when the opening price is higher than the last highest price or lower than the last lowest price. During this time between sessions, no trading occurs.

Definition

For the trader, risk management consists of effective asset-liability management (ALM) with regard to the evolution of interest rates, the constitution of assets and liabilities, currency reserves and the use of derivative instruments. All these activities must be conducted in order to obtain profits and to minimize the risk affecting the financial margin and the assets of the traders.

From a technical point of view, the closing price that precedes the gap is an excellent support in the event of a relapse, but conversely, it is an important resistance in the event of a rebound when the price rises.

Nevertheless, the gaps are not always filled. This is the case, for example, when there is a large price movement.

There are 4 kinds of gaps.

Common Gap

This is the most common, especially in less liquid markets. It takes place during minor events that affect the life of the titles. It has no consequence in the long run because it is, generally, quickly filled. A gap is said to be filled when the price comes back to the previous closing point.

Continuation Gap or Runaway Gap

The continuation gap occurs when the market is already positioned in a trend. Thus, the gap is bullish if the trend is bullish and bearish if the trend is bearish.

This scenario occurs rather, mid-trend, thus allowing the calculation of the potential value. In principle, strong volumes follow the movement, if they are weak, the configuration is unchanged.

This type of gap is difficult to cross.

Gap break or breakaway gap

This gap indicates a change in the trend, a breakout of a graphic figure or a channel output. It is accompanied by strong volumes and, ideally, as wide as possible. In addition, another chart pattern follows them.

This gap is difficult to overcome, whether it is a resistance or a support.

Terminal gap or exhaustion gap

This gap appears at the end of the movement and closes the current session. It is quickly filled and, unlike the two previous ones, does not act as resistance or support.

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