How To Play The Market Gap Ups And Gap Downs
Did you know that one of the oldest trading platforms in Asia is the Bombay Stock Exchange (BSE). It was created in 1875 and established in 1854 by Premchand Roychand on Dalal Street. With more than 5,439 listed companies, it is the largest stock market in the world in terms of the total number of corporations that are listed.
Reports estimated its market valuation to be about Rs. 276.713 crore in January 2022. People frequently wonder if they should invest in the NSE or the BSE. The best choice for Indian investors who are looking to purchase shares of startup companies is the BSE. However, If you’re a day trader wishing to invest in F&O (futures) and take on higher risk in trading shares, you should go to the National Stock Exchange (NSE).
What Are Market Gaps?
Gaps, or vacant zones on price charts, indicate times when no shares were traded inside a particular price range. Market gaps commonly occur between the market’s closing on one day and its opening the next day. In simple words, a market gap is a discontinuous area in the price chart of a security or asset. It takes place between trade hours. It is essentially an area where a security’s price moves up or down from the closing of the previous day without any trade taking place in between. Gaps occur often. However, how do they happen while no trading takes place?
How Do Gaps Occur?
Unexpected gaps emerge as a result of underlying fundamental or technical reasons for a security or an asset. The price of a security or an asset rises or falls as a result of these variables. Market news may affect an asset and end up creating a gap in its price chart. For example, if investors realise that a company’s stocks are overvalued or undervalued, the stock price chart will be affected.
Market Gap Ups and Gap Downs
If a company’s revenues are significantly greater than projected, the stock may surge the next day. This signifies that the stock price began higher than it closed the previous day, resulting in a gap. If a company’s profits were lower than expected, its stock may gap down the next day. This signifies that the stock price began lower than it closed the previous day, resulting in a gap.
Gap Analysis
Gaps, depending on their type, have the ability to predict the beginning of a new trend or the turnaround of an existing trend. It is really easy to spot a gap, however it is hard to spot the type of gap. That’s why gap analysis exists. Gap analysis is a method of comparing the normal price of a stock with its sudden high price. Gap analysis helps in determining how a company will perform over a period of time. In order to perform Gap analysis, it is important to first know the types of gaps that exist in the stock market.
Also Read: Bonus Shares Vs Stock Splits: How Do They Compare?
Types of Gaps
There are generally four types of gaps:
- Breakaway Gaps: Breakaway gaps appear near the end of a security’s price trend. It occurs when the price attempts to leave the congestion area. The “congestion area” in the market is the price range in which transactions take place for a long period of time. The highest point in the congestion when approaching from below is referred to as the resistance level, while the lowest position is referred to as the support level. When the market penetrates the resistance or support barrier, a breakaway gap appears. Breakaway gaps help to pinpoint the start of a new trend.
- Exhaustion Gaps: The exhaustion gap occurs when both the price and volume of a stock increase, generating a gap. It is the inverse of the breakaway gap and happens towards the end of a lengthy uptrend or downtrend. Exhaustion gaps help in determining the shift of a trend.
- Common Gaps: A common gap can also be known as a trade gap or an area gap. It appears in a trading session, confirming the stock’s lack of interest at the moment. They simply reflect an area where the price has shifted. They cannot be arranged in a price pattern.
- Runaway Gaps: Runaway gaps are also known as continuation gaps. They happen in the midst of a pricing trend. Runaway gaps suggest a surge in purchasing interest. It illustrates a frightened state among traders. Significant new stock-related events have the ability to cause runaway gaps.
How to Play the Market Gap Ups and Downs?
Once a stock begins to fill a gap, it will not stop, therefore you must modify your strategies accordingly. With proper gap analysis, you will be able to play the market gap ups and downs effectively and efficiently. For example, if fundamental and technical factors generate a gap on the following trading day, traders can buy shares hours after a company’s stock has given a favourable revenue statement. Since there are chances that the stock will have a gap up on the following trading day. Traders can buy or sell into particularly liquid or illiquid positions at the start of a price movement in the expectation of a good fill. A gap fill essentially signals a price change indicating that the price has returned to its pre-gap level.
