WHAT IS A GAP?
Change in the price of the derivative between the closing price of the last candle and the opening price of the first candle is called Gap. For example, the closing price of the stock is Rs. 100 and next day the stock open at Rs. 110 it’s a Gap Up. What creates the gap is sudden demand or supply of a certain stock arising due to various reasons. These reasons could be anything from industry news, company related news, results etc.
Are all the gaps of same types and should be benefited in the same way?
Each and every gap has to be analyzed independently and based on that only the decision has to be taken. Price gaps are very important to the investor and trader which signifies at times change the direction. A sudden change is demand and supply balance cause the gap and these could be used as set-up or even as an opportunity to enter an options trade.
Now to understand and to analyze a Gap for the purpose of trading it is essential for one to understand what type of gap it and-and then how one can use this as an opportunity to execute a trade.
TYPES OF GAPS
Gaps are broadly classified in two Gap Up & Gap Down. Usually, when the demand is higher than the supply it would result in gap up and same way when the supply is excessive of demand it would result in gap down.
COMPLETE GAP UP
A Gap is called a complete Gap Up only when the opening price of the candlestick is higher than the yesterday’s high of the candlestick. The below chart clearly shows a complete Gap up.
COMPLETE GAP DOWN
A Gap is called complete Gap Down when the opening price of the candlestick is lower than yesterday’s low of the candlestick. The below chart shows a complete gap down.
INCOMPLETE GAP UP
A Gap is called Incomplete Gap when the opening price of the candlestick is not higher than the previous days high. Since it is not completely higher than the previous day high its incomplete gap up.
INCOMPLETE GAP DOWN
Similar to Incomplete Gap Up a Gap is called Incomplete Gap down when the opening price of the first candlestick is not lower than yesterday’s low.
OTHER TYPES OF GAPS
There are other types of the gaps generally most often used. They are as mentioned below.
- Common Gap
- Breakaway Gap
- Runaway Gap
- Measuring Gap
- Exhaustion Gap
- Island Reversal Gap
These are otherwise called Pattern Gaps. And the pattern is established once the entire pattern is formed giving us very limited opportunity to use the window as an opportunity. A window is a term used by the Japanese Candlestick for a gap.
The pattern gaps are not indicators rather they just establish an opinion about the index or stock. They do not give enough opportunity to enter the stock for the purpose of trading.
If you are struggling to make a profit in the trade or the profit you are making are taken away by the market then understanding Gaps could be useful.
If the situation keeps repeating without any real income generation, sooner or later you will find out you’ve wasted your time, energy and money.
If that is the case now is the right time to make necessary adjustments and save from making losses.
Nevertheless, the impact of implementing these corrections the time and other resources you spend in making these adjustments. You might not see more profit with these corrections but definitely, your capital is not going to erode.
Have you experienced this earlier? With this fundamental change have you corrected your strategy? Would you recommend this to a newbie Option Trader? Let’s hear your thoughts in the comments below!
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