However, it should be understood that price gaps can appear in all asset classes. Whenever there are significant disruptions in the general order of the market, price gaps quickly become visible on the charts. In many cases, this can between market sessions or just before a major economic report is released. This latter point is particularly important in foreign exchange and cryptocurrency markets, as traders will often encounter instances where bid/ask spreads widen significantly. However, price gaps tend to be much more common in volatile asset classes which are characterized by low liquidity levels. These types of price gaps occur in all trading markets (i.e stocks, forex, cryptocurrencies, and commodities). In both cases, asset prices display a gap in the market’s normal price patterns (which tend to be much more fluid in their transitions). Second, we can see how unexpected changes in market perception can force prices to move sharply lower (creating a bearish price gap): First, we can see how positive changes in market perception can force prices to move sharply higher (creating a bullish price gap): Next, we will look at two examples of how these price gaps would appear on a price chart. Practice This Strategy Price Gap Formations Ultimately, this means the price of the stock opened the morning session at a higher valuation relative to where it closed on the previous day (thereby leaving a price gap on the charts). Essentially, this means investors do not have the opportunity to buy the stock immediately after the favorable earnings report is released.Īs a result, it wouldn’t be surprising to see share prices gap higher once the market eventually opens and investors have a chance to “catch up” and react to the new information that has become publicly available. In many cases, companies will release earnings before the market opens. As an example, let’s assume a company releases its earnings report and the results are significantly higher than market analysts expected. When used properly, price gaps offer favorable trade set-ups for experienced investors and open the door to substantial profit potential for those interested in active trading.įor some background, it’s important to understand that trading gaps occur due to unexpected changes in the underlying fundamental and/or technical characteristics of an asset. Expert traders are often able to interpret the true meaning behind these price gaps and capitalize on their occurrences as opportunities for investment.
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