For stock, a gap is a break in trading price that sees no trading in between. The most basic and, not surprisingly, common type of gap is the common gap, and if investors can recognize this, they can at times be saved from making unwise trades based on predicted price movements that other types of price movements often point to. Following is some information on how to identify common gap in stock trading.
Gap in Investing
A gap is a change in a security's price that does not allow trading as price moves between levels. For example, if a stock closes one day at $10, and opens the next at $12, it will have gapped up. If price moves sharply from $10 to $7, price will have gapped down.
Common Gap in Stock Trading
A common gap is a break in price that does not result from any major factors. It simply results from the normal way that a stock trades and from overall market conditions, and it generally does not follow major company announcements, such as earnings reports, or news that can affect stock. Common gaps are usually "filled" quickly. This means that the price will reach the price break value shortly after gapping up or down (so, if price gaps from $10 to $12, it generally does not take more than a few days for price to move back under $10). Investors who can distinguish this from other price breaks that do tend to predict a stock's course, such as breakaway gaps and exhaustion gaps, have major trading advantages, as when a common gap is mistakenly taken as a strong indicator of stock price, traders sometimes invest according to their false predictions.
How to Identify Common Gap in Stock Trading
The first thing to do when a gap in price is seen is to see if anything noticeable caused a sudden price movement. If earnings reports were announced, or any news that could strongly affect investor sentiment was released, a gap can possibly indicate the direction in which a stock's price will be headed.
Checking news reports, available for free at discount trade sites like E-Trade, Scottrade, TradeKing, and TD Ameritrade can quickly and easily help any investor determine whether or not serious factors contributed to a gap in price for company stock.
The reason for determining what type of price gap is experienced is so that a trader will know how to react. If price has been falling or staying low overall, and then a gap up seems to result from very positive news reports, a breakaway gap may be beginning, which can subsequently see an uptrend, and rising prices. A breakaway gap can also predict negative, bearish movement. Also generally evidenced by news reports is the exhaustion gap, which can see a short period of a high volume of trades, which wears off, and then prices turn around and drop. A common gap does not necessarily predict price, so investors who can identify it may refrain from basing their trading tactics on the likelihood of price movements possibly predicted by breaks in price that result from certain, direct causes.
Also:
Investopedia on Common Gap in Stock Trading
Thomas Wyatt - Tom Wyatt grew up in Virginia. He has been interested in the outdoors (fishing, birding, camping, and other such activities) since he was ...
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