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Gap

Gap

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.

Explaining 'Gap'

An example of two different gaps can be seen in the chart above. Notice how the stock closes the trading session before the first gap at $50 and opens the next trading day near $46 with no trading occurring between the two prices.

Types of Gaps

Gaps most commonly occur at the open of major exchanges. 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.

Trading Strategies for Gaps

Many shrewd traders use gaps as setups for trade entry decisions. A general rule of thumb for trading gaps in the same direction of the minor trend and accompanied by strong volume is to take a position in the direction of the minor trend. For gaps that occur in the opposite direction of the minor trend, traders take a position contrary to the minor trend with a very tight stop-loss. Taking small quick profits with minimal risk is characteristic of gap trading strategies.


Further Reading

Bridging the theory-practice gap in corporate finance: a survey of chief financial officersBridging the theory-practice gap in corporate finance: a survey of chief financial officers
www.sciencedirect.com [PDF]
August 1997 The ghost of a long-dead growth model still haunts aid to developing countries. The Harrod-Domar growth model supposedly died long ago. But for more than 40 years, economists working on developing countries have applied-still apply-Harrod-Domar model …

The ghost of financing gap: testing the growth model used in the international financial institutionsThe ghost of financing gap: testing the growth model used in the international financial institutions
www.sciencedirect.com [PDF]
August 1997 The ghost of a long-dead growth model still haunts aid to developing countries. The Harrod-Domar growth model supposedly died long ago. But for more than 40 years, economists working on developing countries have applied-still apply-Harrod-Domar model …

Gender and the SME “finance gap”Gender and the SME “finance gap”
www.emerald.com [PDF]
August 1997 The ghost of a long-dead growth model still haunts aid to developing countries. The Harrod-Domar growth model supposedly died long ago. But for more than 40 years, economists working on developing countries have applied-still apply-Harrod-Domar model …

Political Economy of the Income Gap Between Urban and Rural Areas [J]Political Economy of the Income Gap Between Urban and Rural Areas [J]
en.cnki.com.cn [PDF]
August 1997 The ghost of a long-dead growth model still haunts aid to developing countries. The Harrod-Domar growth model supposedly died long ago. But for more than 40 years, economists working on developing countries have applied-still apply-Harrod-Domar model …

Estimation of the Output Gap in China [J]Estimation of the Output Gap in China [J]
en.cnki.com.cn [PDF]
August 1997 The ghost of a long-dead growth model still haunts aid to developing countries. The Harrod-Domar growth model supposedly died long ago. But for more than 40 years, economists working on developing countries have applied-still apply-Harrod-Domar model …

Rural urban income gap and critical point of institutional change [J]Rural urban income gap and critical point of institutional change [J]
en.cnki.com.cn [PDF]
August 1997 The ghost of a long-dead growth model still haunts aid to developing countries. The Harrod-Domar growth model supposedly died long ago. But for more than 40 years, economists working on developing countries have applied-still apply-Harrod-Domar model …

Bridging the gap between accounting and financeBridging the gap between accounting and finance
www.sciencedirect.com [PDF]
August 1997 The ghost of a long-dead growth model still haunts aid to developing countries. The Harrod-Domar growth model supposedly died long ago. But for more than 40 years, economists working on developing countries have applied-still apply-Harrod-Domar model …

The fetal origins hypothesis in finance: Prenatal environment, the gender gap, and investor behaviorThe fetal origins hypothesis in finance: Prenatal environment, the gender gap, and investor behavior
academic.oup.com [PDF]
August 1997 The ghost of a long-dead growth model still haunts aid to developing countries. The Harrod-Domar growth model supposedly died long ago. But for more than 40 years, economists working on developing countries have applied-still apply-Harrod-Domar model …


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