What is a Gap in Stocks? | Gaps Explained
Key Takeaways
A gap in stocks refers to a price level on a chart where there is no trading activity between the closing price of one day and the opening price of the next day.
Gaps can occur in both directions, up or down, and can be caused by a variety of factors, including market news, earnings reports, economic data, and other events.
There are several different types of gaps, including common gaps, breakaway gaps, runaway gaps, and exhaustion gaps, each with its own characteristics and implications for investors.
What is a “Gap” in the Stock Market?
In the context of the stock market, a gap is a term used to describe a situation where the price of a stock moves sharply higher or lower over a relatively short period of time, resulting in a "gap" in the chart of the stock's price.
Gaps can occur for various reasons, including the release of significant news or earnings reports, changes in market conditions, or the impact of large trades or other market activity.
Different Types of Gaps
Common gap: This is the most common type of gap, and it occurs when the stock price moves higher or lower in a way that creates a gap between the previous day's closing price and the current day's opening price.
Breakaway gap: This type of gap occurs when the stock price moves sharply higher or lower in a way that signals a change in trend. It is often seen as a sign that the stock is breaking out of a trading range or establishing a new trend.
Measuring gap: This type of gap occurs after a breakaway gap and is used to measure the potential size of the trend that is forming.
Exhaustion gap: This type of gap occurs at the end of a trend and is often seen as a sign that the trend is coming to an end.
Gaps can be an important factor for investors to consider when evaluating a stock, as they can provide insight into the underlying forces driving the stock's price and can potentially signal a change in trend.
Example of a Gap
You will commonly find gaps on the daily time frame since stocks can move rapidly overnight.
The stock DIS has multiple gaps on its daily chart as you can see in the image below.
Gaps on the DIS Chart
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