If a stock is trading lower in the pre-market due to bad news, it will most likely go much lower when the market opens. For example, if you like shorting, you may consider looking for stocks with bad news. You will use the stock screener based on your trading strategies. If a stock lost a huge percentage in the aftermarket or pre-market, it will most likely have a gap down when the market opens. A stock that grew 30% or more in the after-market or pre-market, will most likely gap up when the market opens the next day. You can also screen stocks based on their movements in the extended-hours trading. The screener will allow you to filter stocks based on your preferences.įor example, you can screen them based on percentages or dollar amount. The best way to spot gaps is to use stock screeners. Natural causes such as a pandemic, earthquake, weather, etc.The following are some of the causes of gaps. The cause of this gap can be profit taking or news about the stock.įigure 5: Example of exhaustion gap What causes stock gaps? The stock can go back up or continue in the downtrend depending on the market sentiment. After a big rally, for example, the seller may jump into the market and creates a temporally bearish condition which will create a break low of the previous level. Exhaustion gaps: Exhaustion gaps happen after the price has reached a high level or a low level.You can observe a breakaway gap in the figure below where it happened after an ascending triangle pattern. In general, this pattern indicates the beginning of a trend. Breakaway gaps: Breakaway gaps happen at the end of a trading pattern.If a bearish pattern is forming, for example, many people can decide to sell which will drop the price before the pattern is complete. This is due to the high anticipation of the future direction of the stock. Instead, they jump into the market and buy or sell the stock ahead of time. Buyers or sellers do not wait for the pattern to unfold. Continuation gaps: The continuation gaps occur before the end of a pattern.In other words, there will be no trading activities between the close and the opening price. Common gaps: The common gaps represent an area where a gap has occurred.There are four classification of gaps, according to Investopedia. This gap could be a result of bad earning or other bad news that changed investors’ sentiments about the stock. Example of a gap down Figure 2: Example of a A gap downĪs you can see from Figure 2, the stock opened much lower than it previously closed. This is a gap of $1.09 or 4.53% from the previous close. In figure 1, the stock closed at $ 18.61 per share on the previous trading day and opened at 19.45 per share the next day. Risk management when playing the gap Example of a gap up Figure 1: Example of a gap up 13 reasons you are not ready to buy a house.18 mistakes to avoid when buying a house.74 Things to look for When buying a house.
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