Definition of Stock Gap
A stock gap is an area of discontinuity in a security’s price chart, where its price either rises or falls significantly from the previous day’s close, without any trading in between. Gaps typically occur due to significant news or events that impact market sentiment and commonly appear during hours when markets are closed, such as after-hours earnings calls.
Main Types of Gaps:
There are four main types of gaps:
- Common Gaps - Minor gaps that occur in regular market conditions without significant price movements.
- Breakaway Gaps - Occur when the price breaks out of a defined trading range, signaling the start of a new trend.
- Runaway Gaps - Signify a continuation of the current trend, occurring during strong uptrends or downtrends.
- Exhaustion Gaps - Indicate the final stages of a trend and often precede trend reversals.
Stock Gap vs. Other Chart Patterns
| Term | Description |
|---|---|
| Stock Gap | Lack of trading at a price level resulting in a jump or drop in the chart. These can occur for various reasons starting a new trend or changing market conditions. |
| Common Range Break | Price movements that show volatility but with trades occurring, often less significant without indication of a gap change. |
| Volatility Spike | A sudden increase in trading that can lead to jumps but includes price fluctuation and more trades than a gap. |
Examples
- Common Gap Example: If a company announces a minor product release and its stock price might move up by a few points overnight.
- Breakaway Gap Example: A stock price jumps significantly after news of a merger, climbing from $50 to $60 immediately at market open.
- Runaway Gap Example: A stock continuously rallies and holds strong gains after superb quarterly results, creating a series of upward gaps.
- Exhaustion Gap Example: A stock rallies to $100 but then drops back down drastically, signaling the end of a bull run.
Related Terms with Definitions
- Earnings Call: A public among shareholders and analysts to discuss the company’s performance and future outlook; often a catalyst for stock gaps.
- Price Action: Movement in a security’s price that chartists study for potential future price movements.
- Technical Analysis: The study of past market data, primarily price and volume, to forecast future prices.
Formulas, Charts, and Diagrams
pie
title Types of Gaps in Trading
"Common Gap": 25
"Breakaway Gap": 30
"Runaway Gap": 25
"Exhaustion Gap": 20
Humorous Quotes and Fun Facts
“The stock market is like a marriage: You can’t just check it once a day and expect it to grow.” - Anonymous
Did you know? Gaps on price charts can sometimes resemble famous paintings or faces! Just watch out for your imagination playing tricks after a long trading day!
Frequently Asked Questions
Q1: Are gaps good or bad for trading?
A: It depends! Gaps can signal new trends, but they can also stress out traders resulting in bad hair days.
Q2: Can gaps be filled?
A: Yes, gaps fill when a stock returns to its previous trading level. Think of it as the stock’s way of apologizing for the sudden jump!
Q3: How do I trade gaps effectively?
A: Knowing the type of gap can help define strategies. For example, breakaway gaps indicate entry points, while exhaustion gaps might be signs to exit…before it’s too late!
References
- Investopedia on Gaps
- “Technical Analysis of the Financial Markets” by John J. Murphy
Test Your Knowledge: Gap Trading Challenge Quiz
## What causes a stock gap?
- [x] Significant news or market events
- [ ] A change in management
- [ ] Random acts of market kindness
- [ ] An over-adjusted calculator
> **Explanation:** Stock gaps are primarily driven by significant news or market changes that create a lack of trading at a certain price level, not just by management changes or your peculiar calculator.
## How many main types of gaps are there?
- [ ] One
- [x] Four
- [ ] Two
- [ ] However many you want them to be!
> **Explanation:** There are four main types of gaps — common, breakaway, runaway, and exhaustion. Choosing your own number is a bit optimistic!
## What is a runaway gap?
- [ ] A gap in your financial planning
- [x] A continuation of an ongoing price trend
- [ ] A new type of stock race
- [ ] An emergency exit in finance
> **Explanation:** A runaway gap indicates that the stock price is sprinting away in the current direction of the trend. No emergency exit necessary...yet!
## If a stock 'fills the gap', what does this mean?
- [ ] It has created new investment opportunities
- [x] The stock price has returned to a previous level
- [ ] It’s taken a well-deserved break
- [ ] It’s moved into a new neighborhood
> **Explanation:** "Filling the gap" occurs when the stock revisits its former price level. No actual moving boxes required!
## What is an exhaustion gap typically a signal of?
- [ ] A bear market
- [ ] Party time!
- [ ] Market panic
- [x] The end of a prevailing trend
> **Explanation:** An exhaustion gap generally signifies that the current trend might be over. Time for your stock to take a breather!
## Which type of gap often appears after major corporate news releases?
- [x] Breakaway Gap
- [ ] Common Gap
- [ ] Too-good-to-be-true Gap
- [ ] Unusual Business Model Gap
> **Explanation:** Breakaway gaps typically happen following significant news release or material developments about a company, leaving common gaps feeling a bit neglected.
## Which of the following is NOT a gap type?
- [ ] Exhaustion Gap
- [ ] Runaway Gap
- [x] Vacation Gap
- [ ] Breakaway Gap
> **Explanation:** While everyone deserves a vacation, "Vacation Gap" is not recognized in trading circles.
## How do common gaps usually appear?
- [ ] During holidays
- [x] In regular trading without major events
- [ ] Just before market close
- [ ] When stocks get confused
> **Explanation:** Common gaps appear when there are no significant events affecting prices, rather than during holidays or when the market feels a bit lost.
## Can stocks make more than one gap at a time?
- [ ] Definitely not
- [x] Yes, they can!
- [ ] Only in a parallel universe
- [ ] Only if they’ve had a lot of coffee
> **Explanation:** Stocks can exhibit multiple gaps during their price journey through the markets, sometimes even after a caffeine boost!
## After what type of market event are gaps most likely to develop?
- [ ] Economic downturn
- [x] Earnings announcements
- [ ] Corporate parties
- [ ] Corporate decision to work from home
> **Explanation:** Earnings announcements often lead to gaps, while corporate parties usually just lead to awkward conversations and no-price movements!
Thank you for exploring “Stock Gap”! Remember, understanding gaps can be the difference between a well-timed trade and a missed opportunity! 🕵️♂️📈
