What is Gap Up and Gap Down in Stock Market Trading

Gap Down – Meaning 

Gap down refers to the scenario when the opening price of a stock is lower than its previous trading session’s closing price. This can happen due to factors such as negative news, poor financial performance of the company, political tensions, or any other unfavourable events.

Types of Gaps in Stock Market

There are 4 types of gaps, they are as follows:

• Breakaway Gaps

This is seen when the price breaks out of a long-standing trading range. It indicates the beginning of a new trend, either upward or downward. You can spot these gaps through chart patterns like triangles or wedges.

• Exhaustion Gaps

Exhaustion gaps usually take place at the end of a strong trend. It appears as the final price jump in the direction of the trend before it reverses.

• Continuation Gaps

Continuation gaps usually appear in the middle of a trend. This typically reflects the collective expectation of buyers or sellers about the stock's future direction.

• Common Gaps

As the name suggests, it is a straightforward visual showing where the price has changed between trading sessions.

Additionally, gaps can either be full or partial:

• Full Gap Up: This happens when the opening price of the stock is higher than its previous day's price.

• Full Gap Down: This happens when the opening price of a stock is lower than its previous day’s price.

• Partial Gap Up: This happens when the opening price of the stock is higher than its previous day's closing price but does not exceed the previous day's highest price.

• Partial Gap Down: This happens when the opening price of the stock is lower than its previous day's closing price but is not lower than the previous day's lowest price.

Points to Remember While Using Gap Up and Gap Down Strategy

Here are some of the key points that you should keep in mind while implementing the gap up and gap down strategy:

• Understand the Gaps

Whenever a stock fills a gap, it often continues moving due to a lack of market resistance or support in that area. Consider preparing a strategy accordingly, as gaps typically represent zones without resistance or support.

• Analyse the Trend

It is best to thoroughly analyse the trend before trading on a gap. A gap typically indicates the start or end of a trend, and each gap has a unique interpretation that may impact your trading strategy.

You may also want to know the Best Intraday Trading Strategies and Rules

• Avoid Rushed Decisions

Sometimes, you may feel like jumping into a trade as soon as you spot a gap, but this can be misleading. Many gaps are temporary, lasting for a short time. It is better to wait and analyse the gap further before making a trade.

• Identify Gaps Correctly

Recognising the type of gap can be a bit tricky. For example, exhaustion and breakaway gaps might appear similar, but volume can help you differentiate them.

The Bottomline 

To sum up, gap ups and gap downs are not very difficult to spot, and the different types of gaps offer unique insights and interpretations. It is always recommended to use the gap up and gap down strategy with caution.

By understanding each type of gap and its characteristics, you can interpret them even better, helping you to make more informed decisions.