In share market trading, what are the terms “gap up” and “gap down”?
In share market trading, what are the terms “gap up” and “gap down”?
When a stock begins at a price that is significantly higher or lower than its previous closing price, a gap appears on the chart. Changes in supply and demand during market closures, such as after-hours trading or significant news that influences investor choices, cause this shift.
The stock opens higher than the closing of the previous day when there is a gap up. For instance, there would be a gap up if a stock ended at ₹100 yesterday and opened at ₹105 today, representing a ₹5 or 5% advance. Conversely, a gap down occurs when the stock begins lower than the last close, such as when it opens at ₹95 and closes at ₹100, a 5% decline.
Because they indicate price pattern discontinuities and might indicate a shift in the market trend, gaps are crucial in technical analysis. Because these gaps can provide traders hints about the direction of the market and assist them in making well-informed trading decisions, traders keep a careful eye on them.
Types of Trading Gaps in the Share Market
Based on when they appear in a price pattern and what they indicate, there are some basic distinctions between the various kinds of gaps.
In general, the share market has four different kinds of gaps:
Breakaway Defects
You may occasionally see a stock that appears to be trapped in a trading range after it has been oscillating between two levels for some time. The price then unexpectedly breaks free from its previous pattern, known as a breakaway gap, by abruptly rising over a significant resistance level!
This disparity marks the beginning of a novel trend. Like constructing a strong foundation under its feet, the stock typically creates a new support level after breaking out.
The fun thing is that the momentum that follows increases with the size of the gap. Imagine the market preparing for a major push; the wider the gap, the more forceful the subsequent move will be, propelling the stock with significant vigor in a definite direction.
Gaps in Exhaustion
A stock may occasionally experience an exhaustion gap, which indicates that the stock’s momentum is waning and that its trend trip is coming to an end.
When buying activity slows down and selling begins to take control, exhaustion gaps occur. The stock’s top is approaching, and the trend may soon reverse, as indicated by this change from purchasing to selling, which suggests that the rising trend is probably coming to an end.
Runaway (Continuation) Gaps
Imagine that as a stock begins to skyrocket, investors who were not able to take advantage of the first surge suddenly understand that the price is not going to drop. They scramble to make a purchase before it’s too late. A continuation gap is a quick, abrupt price jump caused by trade skipping over successive levels as a result of this purchasing frenzy.
This also occurs during a downturn. If sellers start to panic, the deluge of sales may cause a runaway gap in the opposite direction, with prices plummeting as everyone tries to sell. It’s a crazy, high-volume event that has the potential to significantly change the direction of the stock.
Typical Gaps
A typical gap is similar to a brief diversion; nothing significant occurs before it, and you quickly get back on course. Common gaps in the stock market manifest as abrupt price increases or decreases, but they are often “filled” rather quickly, with the market reverting to its initial level within a few days or weeks.
It’s a small lull in the stock’s regular flow, frequently caused by no significant news or event.
Features of Stocks That Are Gap Up and Gap Down
You need to know how gaps act in order to exploit them. You have to be aware of the following traits of gap ups and gap downs.