What is a ‘Gap’
A gap is a break between prices on a chart that occurs when the price of a stock makes a sharp move up or down with no trading occurring in between. Gaps can be created by factors such as regular buying or selling pressure, earnings announcements, a change in an analyst’s outlook or any other type of news release.
Why and How : Opening gaps are a manifestation of an imbalance in supply and demand at the market opening in a particular security created during the overnight as a result of a newsworthy event that has an effect on a securities price. Savvy day traders exploit these gaps in an attempt to capture quick profits from the price corrections that take place as sellers and buyers struggle to find a new equilibrium price. Gaps that form in the intraday market are usually a result of an important economic announcement.
Intraday behaviour : GAPS offer good trading setups for Intraday traders. No wonder many traders live on playing only the GAPS!.
The possible scenarios could be ….the strength continues in the direction of gap,the price retraces and closes the gap(gap filling),the gap is maintained with little increase in price in either direction.
What then ? : GAP has occured. We become Alert. Note the direction..fine. Wait for confirmation (Of what and when ?) and initiate trade. Two important complex questions.. Confirmation of what ? Strength and direction of GAP : This is easier of the two..the price action that follows the gap will reveal the information.
When?? any time related judgement is generally subjective and depends on the traders conviction and experience. Active traders may see the 1st 5 Min candle as reference and go long/short based on the break of THIS candles range. Traders with patience may wait for 15min,30min or 1hour and see the price wrt Gap to take a decision. Some may give additional importance to Open=Low or Open=High conditions.
….more in the next.
Have a great Trading Week.
(Source : Investopedia)