While analysing charts we come across pockets of blank spaces on the charts that do not show any activity. These blank spaces are areas where no trade has taken place are called as Gaps. Gaps occur when there is a deadlock between the supply side (Sellers) and Demand Side (buyers).This deadlock when resolved we sometimes witness a gap – a downside gap if sellers able to enforce and an upside gap if buyers are able to enforce their way.
Gaps are a common occurrence in today’s Financial Markets. Considering the huge amount of co-relation between the domestic and international markets there has been an increasing sighting of gaps. To make things easier lets try to classify the gaps to enhance our understanding:-
- Breakaway Gap – This occurs when a security after spends some time in range bound action for a while is witnessing an emergence of a trend. Here the struggle between the buyers and sellers is eventually won by the buyers if the gap is on the upside and by the sellers if it is to the downside.
- Runaway Gap The BreakAway gap triggers the momentum in the direction of the gap and invites more participants form the dormant players. The strong participation thus produces further gaps as the demand far exceeds the supply existing at that point in time.
- Exhaustion Gap After a sharp trended move the prices open with a gap only to witness no follow-through in its intended direction. The prices start reversing since open to head lower signalling a reversal.
Gaps as we notice are a common occurrence in todays Financial markets. The only way to deal with Gaps is to participate by trading in the expected direction. IN the illustration above you have seen how the gaps can be spotted. There are many ways to trade the gaps and we shall discuss the same in our next article How to Trade The Gaps?