What is a gap on the stock exchange: reasons and varieties

Why do I use gaps in my trading?

Hi all.
I traded for a very long time without knowing about gaps at all. And my trading was not the most profitable not because of this ignorance. What a gap is in stock trading is not necessary to know in order to trade well. In addition to gaps, there is a lot of things that speculators who drive the market back and forth need to know and take into account. In search of a golden trading strategy, sorting through a lot of high-quality and slag materials, I also became acquainted with the concept of gap. To say that after this my trading became better and brought more profit means deceiving not only you, but also myself.

You can know a bunch of cool trading tricks, and always trade at a disadvantage. If you are reading these lines, it means you want to improve your trading. Most likely, it is not going well for you. But we will talk about this in section 5 of the article.

But I can tell you with complete confidence that the gap is one of the market patterns that are worth noticing. I know that many traders, no matter how much they study, cannot understand all the market patterns, but having understood the gaps, they based their trading systems only on them and traded profitably for a long period of time.

I'm not a fan of such strategies. But for me, any strategy becomes a strategy if it passes all experimental tests. It's the same as launching a rocket to the moon. This means that gap trading strategies have a place. The simpler the better!

I use gaps, but indirectly. I don’t rely on them completely.

Therefore, study this market pattern. Test it, try to combine it with your trading. Or, after unsuccessful takeoffs, throw this strategy in the trash and delete my article from your browser tabs. This means it's not yours! For now, let's study these patterns in the form of gaps. But what if? Will it suit you?

Tips for traders

Experienced stock traders offer proven advice to those who plan to use price gaps in binary options trading:

The gap must move away from the previous value of the stock market quote by at least 20 points;
You should not open a trade deal on the market right away, you need to wait 30-40 minutes;
if it is difficult to determine the type of gap, you should not start trading;
stop loss TP x1.5.

Important! Russian traders can find similar gaps on ruble charts; trading on them is sessional in nature with significant gaps between trading sessions.

What is a gap in trading

There are many definitions of gap. The most understandable thing for everyone is when they say that there is simply emptiness. Hole! There are no quotes!

Price holes at Sberbank

The hole may be so small that it is difficult to see without zooming in and out on the 5-minute charts. Therefore, the gap must be recognized not only visually, but also through numbers.

The gap is very small - only 3 points

Causes of a gap

Markets close and open on their own schedule, and the economic and political life of the world has no weekends or holidays. The event may suddenly make a splash over the weekend, and the markets will win back on Monday. Someone will hastily close their positions, fearing that the situation regarding this news will worsen even more. And the market will open sharply higher or lower, creating a hole.

It is not necessary that the price will continue to fall or rise. Hysteria, or in other words, acting out the news background, can only end in the first hour of trading.

This can happen not only on news, force majeure events, on holiday weekends, but also occurs between the afternoon and evening sessions, on the day of the paper cutoff. This is when shares go through the closure of the register and the price the next day falls by the amount of dividends. And it is worth making an important note that such gaps are formed at the opening of a new trading session.

On illiquid instruments, gaps are mainly formed intraday.

Many gaps on the 5-minute chart of an illiquid asset

Example of a gap between day and evening sessions

Let's look at the oil futures chart. The day session ends at 18-45 Moscow time and 15-minute clearing begins. And exactly at 19-00 Moscow time, trading takes place in the evening session. Very often, gaps are formed in these joint boundaries. Therefore, positions must be transferred very carefully from the day session to the evening session. There must be a margin of safety.

Gap between day and evening sessions on oil futures

Example of a dividend gap

In 2020, dividends on Sberbank shares amounted to 16 rubles. The cutoff was in the summer. The chart shows two regular gaps and one dividend gap. Do you feel the difference in price holes? If you find yourself before the cutoff in a long position, then you are guaranteed a margin call.

Sberbank dividend gap in 2020

An example of a holiday gap

Let's look at an example where even one holiday weekend can lead to a gap. True, in my example below, on Sberbank shares, it closed during the same trading session.

After the November 4 holiday, a bullish gap formed on Sberbank

Concept in simple words

A gap in trading is a price gap displayed on the price chart of the asset being analyzed.

Let's simplify the above definition. A gap is a section of the chart where there was no market activity. That is, the quotes of the asset in question jump over a certain price range.

Let's give a specific example. Pay attention to the section of the chart of ordinary shares of UTair.

You see a classic example of a gap. On January 9, 2020, UTair stock quotes closed at 7.62 rubles. The next day, trading in the chip in question started at 8.38 rubles. This is almost a 10% change in price.

Gaps appear during breaks between trading sessions. Such morning price gaps are due to new information and changing conditions on American and Asian trading floors, which operate when Russian exchanges are resting.

In which instruments do gaps occur most often?

Gaps can occur in all instruments. But on illiquid instruments, I repeat, the gap occurs within the day.

Trading strategies on illiquid instruments based on gaps do not work.

Gaps are an everyday reality there. In most cases, due to the small number of sellers or buyers.

If you take gaps into your trading, it is better to use liquid instruments.

Otherwise, just ignore them. The only thing is that there is still a dividend gap. Above I gave you a good example with Sberbank. Well, for this you need to know the cut-off date for the instrument. Otherwise, such gaps can be impressive, and you can easily get into a margin call. And goodbye to your trading career! Hello, Boss, in a stuffy office at the end of town!

I was also asked a question about the size of the gaps?

This is not such an important parameter for trading. The only thing is that the margin of safety when transferring any position to the next trading day must necessarily include the occurrence of a gap. Even if it doesn’t exist, you will protect your account this way.

Now let's formulate two more important patterns that I notice in my trading:

The more liquid the instrument, the fewer gaps there are.
Sometimes, very rarely, even on liquid instruments a gap may form within the day due to news.

How to identify and recognize a gap (its onset and end)

In order to determine the occurrence of a gap, it is enough to compare the maximum price of the previous day with the opening price of the first candle of the new trading day, or the minimum price of the day with the opening price of the first candle of the new day.

And don’t look at the fact that 10 seconds after the opening of trading there was a price gap, and then it closed. All this can be tracked in 5 minutes. It's still a gap. It just opened and closed right away. To determine the end of the gap closing you need to:

All gaps must be marked with a horizontal line. I mark them with a thin red line. This is easier to see and the color red is usually associated with danger and something particularly important.
If the price that approached the gap exceeded the minimum price during upward dynamics, and the maximum price during downward dynamics, or repeated this figure one to one, then the gap is considered closed.
We remove the red line from the graph.

How to use price gaps

Let's look at several practical ways to use gaps in stock trading:

The price was going up, but then a price gap occurred. Most likely, right now, on the candle, is the best time to make sales; then the price may go down without overcoming the resistance.
Or the gap occurred on a descending chart. It is not advisable to work upward; you need to understand that a small correction will not lead to a radical change in the trend. But the purchases may turn out to be successful.

What does it mean to close a gap?

It's simple. This means closing this price hole. It doesn't matter when. This could happen in years, or maybe in five minutes. And here it is not necessary that the price slightly touches the lower border of the gap and rebounds. It can simply crash below the gap in an uptrend and soar above the gap in a downtrend.

Very often, when a gap does not close by a few tiny points, for most market players this will still be considered the closing of the gap.

Why?

This minimizes the risks of making the wrong move or simply reducing the number of unprofitable stupid trades.

There is also an axiom in the market that gaps tend to close. I don’t recommend making specific trading plans based on this, but you need to understand why gaps can close.

One of the reasons is that short-term traders entered when a gap appeared, and after achieving profit targets, they began to fix their positions. Because of this, a reverse price movement occurs. And so the gap is filled. It might be like this:

Traders opening towards closing a gap in a short-term trade

On a bullish gap, they short the market in order to close the gap.
The possible loss scenario for such traders is shown. The figure above shows a special case when the gap did not close quite a bit and those participants who went short received a stop-loss. If this is a very strong trend, then short-term traders will simply close their positions with a loss; they simply do not have enough quantitative advantage over the army of those traders who followed the trend.

Traders opening towards closing a gap in a medium-term trade

Is this gap trading option more interesting? Do you agree? There are no newbies here anymore. If closing a gap in a short-term trade looks more like a gamble, then this is already a serious trading plan. That is why it is necessary to notice all the gaps on the charts. They may be needed in a few months, a year or even more...

Everything is simple here. Based on the signals from your trading strategy, you enter the market, and adjust your profit goals using gaps that remain from old trends. In the figure I show you an example so that the idea itself is clearer. But there are dozens of drawings of different situations.

Closing gaps as profit targets in medium-term trades

What is gap closing and why does it happen?

Any gap (and Forex gaps are no exception) has a starting point, a place where the price jumped from. It is the return to it after a while or immediately that is closure. I know from experience that this happens in the market from time to time.

The nature of the phenomenon of price landing on Forex after a sharp rise is described by several reasons.

First, trading wisdom: “Buy rumors, sell facts.” Those who, in anticipation of the release of important news, decided to take a risk and entered a position, if the outcome is successful, they take profits, thereby pushing the price with market orders to its original position. Of course, there are enough volumes, because the gap itself requires a huge number of transactions. In the process, the feet of those who entered the market based on facts are hurt.

Secondly, large Forex players: when they load up, they knock the crowd out of positions in order to add liquidity to close their orders.

Third, rapid changes in the economy. There is always something happening in the world. And sometimes news from an hour ago is no longer relevant.

Do gaps always close?

If this were so, everyone would now be bathing in their Jacuzzis, where instead of water there are dollars. I'm not kidding: in Forex there are no constant patterns that allow you to clearly predict a gap or outcome in 100% of cases. In such circumstances, it would be easy to come up with forex strategies based on continuously repeated breakbacks after gaps, and make more money than Grandpa Buffett.

Traders opening in the direction opposite to the opening of the gap

You should understand that even if it opens correctly, the market can still close you, accidentally catching you with the shadow of a candle. Or maybe the market after the gap will grow a little and turn down. Therefore, never take large entry volumes.

If you close with a stop loss, the losses should be acceptable for your trading strategy. The figure shows one such situation. If a trader here takes a long position with a risk of no more than 2%, then he is a good trader. Well, it’s knocked out, it happens. Such a profession!

At a bullish gap, they go long in order to continue growth. The loss option for such traders is shown

Is it possible to predict gaps?

Here you can get a barrage of criticism. I'm ready! ))) I'll tell you that you can predict the appearance of a gap in some situations on the stock exchange. But you can’t bet everything on this. It is also necessary to strictly adhere to risk management.

But those who assume that there will be a gap here will have time to buy or sell at the best price and with the best stop. Yes, it may turn out that this stop will knock out the market, but there is still an attempt or even a few to enter. And then set the loss limiter again. Now let’s think about when we can predict the appearance of a gap:

When the market moves back and forth from one important level to another, stops are knocked out. It pierces the levels deeply and returns to consolidation again.
When the triangle has narrowed and there is nowhere to go, and still the market does not find the strength to launch an impulse to jump out of this framework.
When the trend changed in the market. And the most ignorant traders, realizing this, begin to buy in the hope that they purchased assets at the steepest price. Then an army of those still ignorant joins in, with their minds ignited late, with belated signals of their strategies.
Bomb news. For example, a coup d'etat. Economic news related to oil.
News directly related to the asset. For example, you are trading Gazprom shares. And positive news came out by agreement with all parties on the South Stream gas pipeline.
At the end of a long weekend. For example, New Year's holidays.

Features of order triggering in case of a gap

I would like to consider two typical order triggers when working with gaps.

The first example of orders triggering on a gap

During the previous trading session, you gained some position. Set a stop loss. You mentally calculated the profit you could get and went to rest. And the next day, when you turn on your computer, you see that you have an unfulfilled application.

The stop loss was triggered, but the order was not executed due to a gap

How so? You definitely remember that you did not place a simple order, but a stop loss. Is the broker confused? Or did someone use your password to use your terminal to trade on the market? No guys. It's all of you! It's just that you didn't make a safety margin for the event of an impulse at the opening of the next day or a gap. What is the article itself actually about?

Therefore your stop loss was accepted by the broker. The order at the activation price worked, and from the numerical value that was indicated in the application, the broker sent a simple execution order to the exchange. But it's already too late. The price has already skyrocketed or fallen a lot. And God forbid that this is not close to the margin call price limit.

In this case, you need to close the position at the current market price. There is no need to hope that the price will rebound. Yes! It may bounce, but if it doesn’t bounce, then the losses will be greater and the onset of your nervous breakdown cannot be avoided.

The second example of orders triggering on a gap

You found out the gap, compared your behavior according to your own trading strategy and decided to buy several lots. Look, there’s nowhere to put the order. Just take it and subtract 2% from the purchase price. This stop loss is also called mathematical.

And the market took and cut the stop loss. Or even missed it at high volatility so that this mathematical stop loss did not work. The market left you with unprofitable lots and an unfilled simple order.

Wrong decision to limit losses

Or, in general, they read a lot of analysts and decided that this was their finest hour. And you bought so many lots of the instrument that if the market turns around and goes against you, you will receive a loss of minus 10%.

All day the market grew and grew. And in the evening, against the news background, he took it and fell. It fell so much that it wiped out the so-called breakaway gap from the face of the market. And minus 10% of the capital that you earned the entire previous month left your account.

Risks of price gaps

In general, the appearance of a price gap on a stock chart provides a very good chance of success, but only if the gap was formed in the direction of the open position. However, even here there are risks, a gap may appear contrary to all forecasts and a stop order may work. In this case, the trader will receive losses.

In Forex, the vast majority of price gaps occur on Monday, at the beginning of the trading week. There are risks for those traders who did not close their positions on Friday and are now faced with a choice.

What to do? Decide on your trading style. If you work in the short term, then trades need to be closed during the day or at the end of the week, not leaving it until Monday. And for medium- and long-term trading, a small gap on Monday is not terrible; their goal is several thousand points, and not 50 or even 100, as is usually the case with a price gap after the weekend.

Important

Be sure to check out the news. Will there be presidential debates this weekend? Or a speech by the leader of the country? Or an important summit? Then you definitely shouldn’t leave closing the deal until Monday; the risks of price gaps increase sharply.

Simple gap

A simple gap is not as simple as it seems. Until this gap has outlived its usefulness, in most market situations it will be interpreted by everyone as a gap at the end, a gap at the gap, a gap at the break.

Why do you think?

Yes, because every single trader is impatient. I am also an impatient trader. But my deal journal helps me shake things up. And I want to quickly go to the market to earn money for an apartment, a car, or a vacation. Everyone wants a beautiful life, and give it quickly.

All this beautiful Instagram life just blows the minds of ordinary people. And after reading books and advice about entry points, they begin to see them in everything. At the slightest hint, the rest of the picture is conjectured. After all, you want to make millions quickly.

And then it turns out that this is an ordinary gap. And there are no other prerequisites for its appearance. The usual price gap on old news. But there is no trend, and important levels have not been overcome, and the volatility is very low. And the volumes are worse than on New Year's days.

Simple gap

For me, a simple gap is the first thing I think of any gap that arises. And I put this interpretation on a par with other strong arguments. If the probability of this gap degenerating into others is high, then I look for the optimal entry point. Often you have to wait for several hours. And of course we set a stop loss.

Take this idea and implement it in your trading!

Varieties

Trading theory distinguishes 2 main types of gaps:

attrition gap;
acceleration gap.

Let's look at each named variety separately.

An exhaustion gap is a gap that is not confirmed by a strong trend in the same direction. Such a price gap is highly likely to close within 1-2 trading sessions.

An acceleration gap is a gap that is confirmed by a strong trend in the same direction. Such a price gap has a fairly low chance of closing within the next few trading sessions.

To identify gaps, in addition to trends, the MACD indicator is used. The specific algorithm will be discussed below in strategies that allow you to make money by trading price gaps.

A special case is a dividend gap. An article on this topic is available here.

Gap at the end

Such a gap is very insidious, especially for beginners. Let's start with the definition.

A breakout gap is a price hole that occurs before a change in trend direction. It may or may not close.

Now I’ll give you a classic example. Some trend is growing, growing almost without reversal. Even the most clueless traders are beginning to say that they have already outgrown the average growth over the years without pullbacks. It's time to fall. Or vice versa, in a downtrend, it’s time to grow.

All! At this moment, they get it in their head that if there is a gap now, then it will be a gap at the end.

Gap to break

This is exactly the gap I love. He is the most predictable. Let's also start with a definition.

A gap gap is a price hole that occurs when the price comes out of some kind of consolidation, sideways trend, or the implementation of some kind of graphical pattern (head and shoulders, flag, etc.)

Above in the section there was a question: Is it possible to predict a gap? The break gap is very predictable. And with it you can enter the market well. It’s just that not all traders may have the patience to wait for either its onset or the onset of other market patterns.

For a good trader, waiting for a gap to break should not be a panacea. His emotional level should freeze at one value and not cause any negative reactions if this gap does not occur. Or, God forbid, it will become not a gap for rupture, but a gap for destruction.

We don’t know anything in advance. We only assume, and protect ourselves from negative consequences through risk management. When a gap occurs, there is a very high probability that the market will not close it. But this doesn't always happen. It happens that he closes this gap or comes very close to its beginning without ever closing it. And this is the stop for entering the bus of professionals! Remember it.

Typically, professionals place simple orders closer to the beginning of the gap, and place a stop loss behind the “broad shoulders” of some good level. After all, it’s not always possible to buy it right away. Where should we put the stop, comrades? Got it? This is happiness. Buy further or sell lower and you are guaranteed a stop loss of minus 5%. Or minus 2%, only faster and more useless.

Let's help other more seasoned guys from the market earn capital! And sit and read smart books about trading, while snacking on a palm bagel from Magnit!

Here is a classic example of a gap gap.

A classic example of a gap gap

Gap on the lead

A gap gap occurs on a stable upward or downward trend.

A breakaway gap is a price hole that appears after a strong movement and is an indicator of the strength of the trend. Most often, such a trend has two or more measuring gaps.

And his presence suggests that this is a very strong movement. These gaps can be good support for a growing trend. And good resistance in a downtrend.

Gap on a break on a very strong uptrend

As can be seen from the figure above, traders measure potential growth at such a gap. This will be considered the distance between such gaps in a strong trend. Most often, such potential movements are overfulfilled.

Look at the drawing for yourself. It can be seen that they set one profit goal, where it is necessary to close the position with a profit, and the price went even higher. If we did not close the position where we planned, then the profit plan would be exceeded.

GAP and how to use it on the stock exchange

Hello, dear colleagues and future investors! Today we will talk about what GEP is. The reason for a detailed analysis of this topic was the section “Criticism of Candlestick Analysis”, published in the article “What are Japanese candlesticks and how to make money with them on the stock market.” Let's remember what the essence of the issue .

First, I said that any candlestick pattern is a randomly formed figure , from which it is impossible to predict the future movement of the market.
As an example, I took the main rule by which GAP is traded. It sounds like this: if a price gap has formed, then with a 90% probability the price will immediately try to cover .
In conclusion, I led readers to the following logical chain: a recognizable figure appears on the market → most traders begin to trade based on its signals → the market maker moves the market against the bulk. If you want more information, check out the article on Japanese candlestick combinations.

Examples of gaps

Let's see how it looked with examples . EUR/USD pair , traded on Forex. The reason for this gap was the results of the French presidential elections. All traders who traded down and expected the price to return received a loss .

Next, we will go through several classic technical analysis books and analyze all the basic information about price gaps that is addressed to readers.

Book by Jack Schwager

There are four types of gaps : normal , acceleration , depletion and gap that occurs when a level is broken out.