Gap Trading: How to Trade Gap Stocks

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Traders can use 'gap trading' strategies to identify and take advantage of sudden, unexpected price movements in stocks that occur overnight when the market is closed. By analyzing the different types of gaps that can form, such as breakaway, common, continuation, and exhaustion gaps, traders can devise appropriate entry and exit points for their trades to potentially profit from the volatility.

Why it matters

Gap trading provides opportunities for traders to capitalize on rapid price changes in the stock market, but requires careful analysis of the underlying reasons and patterns behind the gaps. Understanding how to properly identify and trade gaps can help traders manage risk and find low-risk, high-reward trading setups.

The details

Gaps occur when a stock's opening price is significantly higher or lower than the previous day's closing price, creating a blank space on the price chart. These gaps can be caused by a variety of factors, such as earnings reports, news announcements, or changes in supply and demand. Traders can classify gaps into different types based on their position within a price pattern, and use that information to inform their trading strategies. For example, breakaway gaps signal the start of a new trend, while continuation gaps occur in the middle of an existing trend.

• The stock market closes for the night and re-opens in the morning with no trading activity in-between for a particular share.