A "gap" in the context of price refers to a significant difference or discontinuity between the closing price of one trading period and the opening price of the next trading period, where no trading activity occurred in the price range between them. These gaps are typically seen on price charts and can provide important information to traders and analysts.
Gaps can be classified into several types based on their appearance on a price chart:
- Common Gap: A common gap is a relatively small price gap that often gets filled relatively quickly as trading resumes. Common gaps are typically seen within trading ranges or during periods of low volatility.
- Breakaway Gap: A breakaway gap occurs when the price breaks out of a significant trading range, and the gap signifies a strong shift in sentiment or trend. These gaps may not get filled quickly and can indicate the beginning of a new trend.
- Runaway Gap: Also known as a continuation gap, a runaway gap appears within an existing trend, indicating that the trend is likely to continue. Runaway gaps can provide insights into the strength of a trend and are often seen as confirming the trend's direction.
- Exhaustion Gap: An exhaustion gap occurs near the end of a trend, signaling that the trend is losing momentum and may be nearing a reversal. These gaps can be seen as a warning sign that the current trend may be nearing its end.
Gaps can occur in various financial markets, including stocks, commodities, forex, and cryptocurrencies. They are often associated with significant news events, earnings reports, economic data releases, or other factors that can lead to abrupt changes in market sentiment.
Here are some common reasons for gaps:
- Market News or Events: One of the most common reasons for gaps is the release of significant news or events that impact the market after trading hours. For example, an earnings report, economic data release, geopolitical event, or unexpected news can cause prices to gap when the market reopens.
- Market Sentiment: Sharp shifts in market sentiment can lead to gaps. If traders and investors suddenly change their outlook on an asset, it can result in a gap as the new sentiment is priced in.
- Liquidity Gaps: Gaps can occur when there is a lack of liquidity in the market. During illiquid periods, such as overnight or during holidays, there may be fewer market participants willing to trade at certain price levels, causing gaps when the market reopens.
- Gaps at Market Open: Gaps often occur at the opening of a trading session due to the imbalance between buy and sell orders during the market's closed hours. The opening price may be significantly different from the previous day's closing price.
- Technical Factors: Technical factors, such as large stop-loss orders or limit orders placed at specific price levels, can also cause gaps when these orders are triggered.