What is a Gap?
A gap is a change in price levels between the close and open of two consecutive days. A Full Gap Up occurs when the opening price is greater than yesterday’s high price. And a Full Gap Down occurs when the opening price is less than yesterday’s low.
Why should investors care?
Gaps indicate “event sensitivity” of the index. In the normal course of business, as information is absorbed by the market, the price reacts. However, if significant events occur outside of market trading hours, the information gets priced in through “gap” opens. And gaps can be traded.
Gap History
The number of gaps have gone up significantly since 2010. Here’s a chart of the number of full gaps (both up and down):
Zooming in, from 2010 onwards:
On an average, down gaps have displayed higher magnitude, compared to up gaps:
Specifically:
Trading the gap
Not only do opening gaps occur daily and offer significant profit opportunity,but they have an inherent directional bias. The following links take you to some of the most common gap trading strategies:
Gap trading is an opportunity worth exploring.
