Who it's for — Anyone who trades stocks and wakes up on Monday morning to find their account halved despite having a Stop Loss in place. The Gap makes you understand the dangers (and opportunities) of markets that close overnight.
A Gap occurs when the opening price of a candle is significantly higher or lower than the closing price of the previous candle, literally leaving an empty space on the chart where no trading occurred.
This typically happens in traditional markets (like the stock market) that are not open 24/7. The market closes at 10:00 PM, shocking news about the company comes out overnight, and at 9:30 AM the next morning the market reopens with a completely different price.
In simple terms — Imagine a store that sells used iPhones. On Friday evening it closes, selling them for $500. On Saturday, Apple announces that that specific model of used iPhone explodes. The store reopens on Monday: no one will want to pay $500 for them anymore; the price will instantly crash to $50 as soon as the shutter rolls up. There was a leap into the void.
Gap Up and Gap Down
Depending on the direction of the "jump," Gaps are divided into two main categories:
- Gap Up: The opening price is higher than the previous close. This is usually caused by extremely positive news (e.g., the company earned triple what was expected) that arrived while the market was closed. The euphoria is so high that buyers offer very high prices just to get the shares at the open.
- Gap Down: The opening price is lower than the previous close. It is the terror of every stock trader. If you bought at $100 and put your Stop Loss at $95, but a scandal breaks out overnight and in the morning the stock opens at $70, your $95 Stop Loss will not save you, because the $95 price was never traded. You will be sold directly at $70.
"Gaps are always filled"
There is an old saying among traders: "The market hates a vacuum, gaps are always filled."
It means that, sooner or later, the price will tend to come back to trade in that empty area left by the jump. Is it true? Yes and no. Statistically, many gaps are "filled" in the following hours or days (the price returns to test the level before resuming, like in a Pullback), but there is no physical law that forces the market to do so. Some gaps created decades ago on very strong stocks have never been closed.
Summary Sheet
- What it is: An empty space on the chart where no trades took place due to a sudden jump in price.
- Main cause: News or events that occurred when the market was closed (or in very illiquid markets).
- The Crypto market: Being open 24 hours a day, 7 days a week, true gaps in cryptocurrencies are extremely rare (they are only seen on CME futures or in the event of sudden server crashes).
Bronze Path — Module 2: How price moves. You have completed the Module! Go to Module 3: bronze-path.
Links
- candela-giapponese — How to read the open and close that generate the gap.
- pullback — The price often returns to "close the gap" in a way similar to a pullback.
- bronze-path
Module: Module 2 — How price moves
Be able to describe a chart without inventing forecasts.
