There arevarious ways in which traders can take advantage of certain market situationfor profit and gains. It requires the use of various trading techniques whenrecognizing a certain market situation where potential gains can be made. Oneof those typical yet no so common practices is taking advantage of price gapsin the market.
What Is It?
Gaps are basically areas in a chart where the price of a certain stock movessharply up or down without or just little trading activity made in between.This results in a certain gap seen in a price pattern on a chart that seems tocome out of nowhere. Through this price gaps, traders can try to interpret andexploit this situation for possible gains.
Gaps in normal price patterns can be a result of certain technical andfundamental factors.
One possible factor is when a company releases earnings reports that aremuch higher than what was expected. The company stock price may exhibit a gapin its normal price pattern because of the good earnings results, even whenthere was no trading going on in between.
Gap Classifications
Gaps are usually classified into four distinct groups. There is the commongap which is a gap that just can’t be placed in a price pattern. They justindicate a certain area where the stock price just gapped. There is what iscalled a breakaway gap, which occurs usually at the end of aprice pattern that may signify a beginning of a new trend. Continuationgaps are those that are found in the middle of a price pattern that usuallyindicate a rush of buyers or sellers of a certain stock acting on a commonbelief of the future direction of the said stock. Exhaustion gaps are gaps thatusually occur near the end of a price pattern that may indicate a final attemptof the stock to achieve new highs or lows. Money Finance – GuideTo.Com