A gap is an area of price gaps and discontinuity on a financial instrument's chart. It occurs when the opening price of a trading period has risen or fallen significantly compared to the closing price of the previous trading session. As a rule, gaps occur under the influence of important news.
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What is a gap
Gap is a technical analysis term used to describe a significant difference between the closing price of the previous time frame (candlestick on the chart) and the opening price of the next time frame. Visually, a gap corresponds to the gap in the price chart, the absence of quotes between adjacent periods. In stock trading, gaps occur most often in the stock and commodity markets.
These are usually triggered by the publication of important economic or political news. There is a significant break between trading sessions on the stock market. If important economic statistics are released at the same time (e.g., quarterly or annual earnings report), the next trading session may open with a price gap. The more significant the published news, the larger the gap.
Types of gaps
A distinction is made depending on the direction of the gap:
A gap up is a situation where the opening price of a new candlestick is significantly higher than the closing price of the previous candlestick.
Gap up
A downward gap is when the opening price of a new candlestick is significantly lower than the closing price of the previous candlestick.
Gap down
Depending on the behaviour of the price, a distinction is made conventionally:
Simple gap – this is formed within a local price range. After its occurrence, the market does not move very actively, and trading volumes are low. After such a gap, the price often goes back and closes it
Gap breakout – quotes exit a consolidation zone and break through a strong support or resistance level. This is accompanied by a sharp increase in trading volume and leads to the start of a new trend in the direction of the gap
Continuation gap – this is formed in the direction of the current trend (usually in the middle of a trend), accompanied by an increase in trading volumes. It is a confirmation that the current trend is likely to continue
Gap depletion – this appears at the end of an active trend and signals an imminent price reversal. After a gap, quotations quickly reverse and move in the opposite direction with high trading volumes
Example of a gap
Twitter Inc. stock (NYSE:TWTR) opened with an upward gap on 4 April 2022, following the news that Elon Musk had bought around 10% of the company. He was expected to further increase his portfolio and join the company's management.
An example of a gap on Twitter's stock chart
The news sent Twitter's stock up more than 30% in two days. Investors were optimistic, as they expected the stock price growth to continue. But soon news emerged that Mr. Musk refused to join Twitter's board of directors and that he might be selling the company's shares which he had bought earlier. As a result, investors reduced their purchases, the quotes reversed downwards, and the gap was soon closed.
What is a gap
Gap is a technical analysis term used to describe a significant difference between the closing price of the previous time frame (candlestick on the chart) and the opening price of the next time frame. Visually, a gap corresponds to the gap in the price chart, the absence of quotes between adjacent periods. In stock trading, gaps occur most often in the stock and commodity markets.
These are usually triggered by the publication of important economic or political news. There is a significant break between trading sessions on the stock market. If important economic statistics are released at the same time (e.g., quarterly or annual earnings report), the next trading session may open with a price gap. The more significant the published news, the larger the gap.
Types of gaps
A distinction is made depending on the direction of the gap:
A gap up is a situation where the opening price of a new candlestick is significantly higher than the closing price of the previous candlestick.
A downward gap is when the opening price of a new candlestick is significantly lower than the closing price of the previous candlestick.
Depending on the behaviour of the price, a distinction is made conventionally:
Example of a gap
Twitter Inc. stock (NYSE:TWTR) opened with an upward gap on 4 April 2022, following the news that Elon Musk had bought around 10% of the company. He was expected to further increase his portfolio and join the company's management.
The news sent Twitter's stock up more than 30% in two days. Investors were optimistic, as they expected the stock price growth to continue. But soon news emerged that Mr. Musk refused to join Twitter's board of directors and that he might be selling the company's shares which he had bought earlier. As a result, investors reduced their purchases, the quotes reversed downwards, and the gap was soon closed.