There are various ways in which traders can take advantage of certain market situation for profit and gains. It requires the use of various trading techniques when recognizing a certain market situation where potential gains can be made. One of those typical yet no so common practices is taking advantage of price gaps in the market.

What Is It?

Gaps are basically areas in a chart where the price of a certain stock moves sharply up or down without or just little trading activity made in between. This results in a certain gap seen in a price pattern on a chart that seems to come out of nowhere. Through this price gaps, traders can try to interpret and exploit this situation for possible gains.

Gaps in normal price patterns can be a result of certain technical and fundamental factors.

One possible factor is when a company releases earnings reports that are much higher than what was expected. The company stock price may exhibit a gap in its normal price pattern because of the good earnings results, even when there was no trading going on in between.

Gap Classifications

Gaps are usually classified into four distinct groups. There is the common gap which is a gap that just can’t be placed in a price pattern. They just indicate a certain area where the stock price just gapped. There is what is called a breakaway gap, which occurs usually at the end of a price pattern that may signify a beginning of a new trend. ┬áContinuation gaps are those that are found in the middle of a price pattern that usually indicate a rush of buyers or sellers of a certain stock acting on a common belief of the future direction of the said stock. Exhaustion gaps are gaps that usually occur near the end of a price pattern that may indicate a final attempt of the stock to achieve new highs or lows.