Sunday, April 06, 2008

Gaps: Technical Analysis term

"In today's markets, many stocks can have large supply-demand imbalances at the opening bell. Often, these imbalances result in what are known as "gaps", when the opening price is higher or lower than the preceding close.

News, in various forms, is generally the catalyst for gap openings. The most common type is macroeconomic news such the release of economic indicators such as unemployment,Inflation figures,or stock-specific news such as earnings surprises or analyst upgrades or downgrades…"


What is a gap?
A gap is defined as a price level on a chart where no trading occurred. These can occur in all time frames,we are mostly concerned with the daily chart.

A gap on a daily chart happens when the stock closes at one price but opens the following day at a different price.

This happens because buy or sell orders are placed before the open that cause the price to open higher or lower than the previous day's close.

Filling The Gap
In Japanese Candlestick Charting gaps are referred to as windows. When we say that a stock is "filling a gap", the Japanese would say that the stock is "closing the window".

Sometimes you will hear traders/idiots like me say that stock is "filling a gap" or say that a stock has "a gap to fill".They are talking about a stock that has traded at the price level of a previous gap.

when stock is gapped up/down. A few days later it rallies back up/down and fills in the price level at which there were previously no trades. This is known as filling the gap.

Sometimes you will hear traders saying that "gaps always get filled". This just simply isn't true. Some gaps never get filled, and sometimes it can take years to fill a gap.

learn more here or google term "trading gaps":
http://www.incrediblecharts.com/technical/gaps.php
http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:gaps_and_gap_analysis
http://stockcharts.com/school/doku.php?id=chart_school:trading_strategies:gap_trading_strategies
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