Gap in investing is a break in a security's price which occurs when it jumps from one price to another. The runaway gap is a type of price jump that takes place during a stock's rising or falling course, and it is caused by trading activity that affects the stock, and it generally bolsters the prevailing trend. Following is some information on what runaway gap is in stock trading, and on how it can be identified for investing success.
Gap in Stock Trading
A gap in investing is a break in any security's price which does not see trading in between. For example, a stock's closing one day at $10, and opening the next at $12 would indicate that it gapped up, as no trading occurred between prices. If it quickly dropped from $10 to $8, it would have gapped down.
What is Runaway Gap in Stock Trading?
A runaway gap in investing is a type of price jump (up or down) during bullish or bearish price movements. If stock is uptrending, it can jump up based on positive investor sentiment (causing traders to buy into it rapidly), and then continue rising. If a security is experiencing a downtrend, it could gap down as a high volume of traders unload stock to prevent further loss, and the downward momentum could then continue dragging the price down.
How to Identify Runaway Gap
A runaway gap occurs when stock is already on a certain course (meaning that prices are rising or falling). After a positive trend has been established, high volumes of buys could cause this type of gap, and when a stock is downtrending, a lot of sells can cause it to experience a runaway gap on the downside.
This type of price break can initially look very similar to the price movements during an exhaustion gap, which generally precedes the end of a trend and a reversal. The exhaustion gap tends to occur very late in a trend as it is weakening, however, and it often results from very short term investor sentiment that causes high volumes of trades. The runaway gap, on the other hand, occurs during a steady trend, and following a high volume of trades, the positive or negative investor sentiment does not wear off quickly, and it takes some time for the gap to fill, even if the gap is much more intense that the direction of the price movements that follow it.
Determining which type of gap occurs when price jumps is crucial. This means traders will need to predict whether price will continue rising or continue falling after gapping up or down. If a trend seemed very steady, and it had not yet carried the price to the point that it seemed likely of turning around, a price jump is likely a runaway gap. Referring to news reports that can affect stock, available for free at discount trade sites like E-Trade, Scottrade, TradeKing, and TD Ameritrade can also help investors determine the likelihood of a stock's continuing its course. If news that may have contributed to a price gap seems to be misinterpreted or minor, especially late in a trend, the trend could be wearing out, or "exhausting," and likely the runaway gap has not taken place, as the gap might quickly fill.
Also:
Investopedia on Runaway 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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