In investing, a gap is a break in a security's trading price that sees no trading in between. For example, if a security closes one day at $10, and opens the next, trading at $12, it will have gapped up. Knowing what an exhaustion gap is in stock trading can be very influential in any trader's investing success, as it can predict the end of rising prices when correctly identified. The following provides information on this stock trading phenomenon.
What is Exhaustion Gap in Stock Trading
An exhaustion gap in investing is a gap in trading price that occurs toward the end of an increasing price movement for a security. Often, it follows positive news, such as earnings reports or any other announcements that can affect the way investors behave, causing high volumes of trades. This tends to wear off shortly after the gap, and prices will generally fall shortly afterward, as the rising price movement is exhausted. Exhaustion gap can also refer to a gap down late in a downtrend.
Causes of Stock Trading Exhaustion Gap
Anything that can lead to high volumes of buys based on investor optimism during an uptrend may cause an exhaustion gap. Positive reports or company news, as well as misinterpreted news or announcements which can supply traders with bullish sentiments can lead to panic buying, which wears off with enough force that prices actually begin to fall and a reversal in trend is then experienced.
How to Spot Exhaustion Gap in Investing
This type of gap tends to add to strong directional price movement of stock. When a stock is rising, and has been for at least the recent past, a gap on the upside that accompanies any positive or potentially positive news (reports are available for free at discount trade sites like E-Trade, Scottrade, TradeKing, and TD Ameritrade) can point to high volumes of buys, which can push the price as high as it will go. If this situation arises, and a stock gaps up following factors that could fuel positive sentiments among investors, the security's price may be seeing this type of gap.
How to Trade Stock According to Exhaustion Gap
Though there is never any indicator that predicts stock price with certainty (as what seems to be an exhaustion gap could be followed by continuing price increases for stock), generally if an exhaustion gap seems to be occurring, it can be very wise to unload stock.
Although there is always the chance that price will rise more, if it seems at least as likely to fall (according to any trader's prediction), exiting the trade, particularly if doing so means realizing satisfactory returns, is the best investing move and the safest way to react to an exhaustion 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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