A gap is an area a chart where the price of a financial instrument moves up or down sharply with little to no trading in between. The asset chart shows a gap in the normal price pattern.
When a gap “fills”, it means the price has moved back to the original pre-gap level.
For example, when a company’s stock price falls below the previous day’s low, it is said to have “filled the gap.” This may happen when there is bad news about the company, such as poor earnings results.
In this example, investors who bought the stock at higher prices are now “trapped” with losses. The gap fill can also be an indication that the stock’s price has bottomed out and may start to rise again.
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What’s a Gap Fill?
The dictionary defines a gap fill as “an unfilled space or interval.” When it comes to stocks, a gap fill is the act of buying a stock to fill the void left by a previous price move. For example, imagine you own shares of Company XYZ and the stock price gaps up from $10 to $12. You might want to buy more shares at $12 to fill the gap.
There are two types of gaps that commonly occur in the stock market: breakout gaps and continuation gaps. As their names suggest, breakout gaps signal a break from a previous trading range while continuation gaps signal the continuation of an existing trend. We will take a closer look at them later.
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What Causes Gaps?
There are many reasons why gaps can form in stocks. One common reason is that there is news about the company that causes investors to buy or sell the stock. For example, if a company announces a new product, this could cause the stock to gap up as investors buy the stock in anticipation of the new product. Similarly, if a company announces poor earnings, this could cause the stock to gap down as investors sell the stock.
Another common reason for gaps is when there is a change in analyst ratings or price targets. For example, if an analyst upgrades a stock from “hold” to “buy”, this could cause the stock to gap up. Conversely, if an analyst downgrades a stock from “buy” to “hold”, this could cause the stock to gap down.
Finally, gaps can also form due to technical factors such as a breakout from a key level of resistance or support.
Gaps can be either bullish or bearish, depending on the direction of the gap. Bullish gaps occur when the stock gaps up, while bearish gaps occur when the stock gaps down.
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Why do stocks need to fill gaps?
One reason stocks may need to fill gaps is due to the price action. When a stock prices gaps up or down, it leaves a hole in the chart. This hole is called a gap. Some traders believe that gaps need to be filled before the stock can continue moving in the direction of the gap.
Another reason stocks may need to fill gaps is due to fundamental analysis. A company may have released new information that has caused the stock to gap up or down. Traders who follow fundamental analysis may want to buy or sell the stock when it fills the gap.
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Four Gap Types
There are four types of gaps that can occur on a stock chart: common, breakaway, runaway, and exhaustion. Each type of gap has a different meaning and implications for traders.
A common gap is a period of time where the price of a security doesn’t move. This type of gap is fairly normal and happens often. A breakaway gap is when the price suddenly jumps higher or lower, away from the previous trend and starts moving in the opposite direction. This type of gap can signal a change in trend.
A runaway gap occurs when the price starts to move very quickly in one direction, away from the previous trend. This type of gap can signal that a major move is happening in the market. An exhaustion gap occurs when the price starts to move very quickly in one direction, and then reverses. This type of gap can signal that a trend is about to end.
Let’s take a closer look at common and breakaway gap:
Common Gaps
Common gaps occur during an uptrend or downtrend. They don’t necessarily signal a change in the trend, but they can provide clues about future price movement.
There are three types of common gaps: continuation, exhaustion, and measuring.
Continuation
Continuation gaps happen when the stock is in an uptrend and continues to move higher after a brief pause. This type of gap is often seen as a bullish signal, indicating that the stock still has momentum and could continue moving higher.
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Exhaustion Gap
Exhaustion gaps happen when the stock is in a downtrend and briefly pauses before continuing its downward move.
This type of gap is often seen as a bearish signal, indicating that the stock still has downward momentum and could continue moving lower.
Measuring Gap
Measuring gaps are a bit different. They don’t necessarily signal a change in trend, but they can be used to measure the strength of a current trend. Measuring gaps happen when the stock price moves higher or lower by approximately the same amount as the previous move.
For example, let’s say the stock is in an uptrend and rallies $10 per share. Then, it pauses for a few days before resuming its upward move. If it rallies another $10 per share, that would be considered a measuring gap.
Breakaway Gaps
Breakaway gaps are much more significant than common gaps. They often signal a change in trend or momentum and can offer clues about future price movement.
There are two types of breakaway gaps: island and runaway.
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Island Gap
Island gaps happen when the stock price breaks out from a trading range and then pauses, forming an island on the price chart. This type of gap is often seen as a bullish signal, indicating that the stock could continue moving higher.
Runaway Gap
Runaway gaps happen when the stock price suddenly spikes in one direction or the other, with no pause in between. This type of gap is often seen as a very bullish or bearish signal, depending on which direction the stock price moves.
When you’re looking at a stock chart, it’s important to pay attention to both common and breakaway gaps. Common gaps can provide clues about future price movement, while breakaway gaps often signal a change in trend or momentum. If you’re planning on trading gap fill stocks, it’s important to understand the different types of gaps and what they mean before you start trading.
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Do Stock Gaps Always Fill?
The simple answer is no. Just because a stock gaps lower or higher does not mean that the price will move back to fill that gap. In fact, many times, stocks will continue in the direction of the gap.
However, there are certain conditions where it is more likely for a stock to fill its gap.
One such condition is when the stock has gapped below or above a significant support or resistance level. If the stock is able to break through that level, it is likely that traders will push the price back in order to fill the gap.
Another condition that increases the likelihood of a gap being filled is when the volume is abnormally high during the gap. This usually happens when there is some sort of news event that causes a spike in trading activity. If there is enough buying or selling pressure, the price will move back to fill the gap.
Lastly, stocks that have been range-bound for a period of time are more likely to fill their gaps. This is because there is typically less conviction amongst traders and therefore it is easier for the price to move back to where it was before the gap occurred.
While there are certain conditions that make it more likely for a stock to fill its gap, there is no guarantee that it will happen. So, if you’re considering trading a stock that has gapped, be sure to do your own analysis to determine whether or not the gap is likely to be filled.
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Trading Gap Fill Stocks
The “gap fill” is a popular trading strategy among stock investors. The idea behind the gap fill is to buy a stock that has gapped down (or up) on high volume and then selling it once it fills the gap.
There are two types of gaps that traders look for when using this strategy: price gaps and volume gaps.
Price gaps occur when the price of a stock moves sharply in one direction or another, without any trading taking place in between. For example, if a stock trades at $10 per share one day and then opens at $12 per share the next day, there would be a $2 price gap on the previous day’s close.
Volume gaps occur when there is a sharp increase or decrease in the amount of trading activity for a particular stock. For example, if a stock typically trades 5 million shares per day but suddenly trades 10 million shares one day, there would be a volume gap.
The gap fill strategy can be used on any time frame, but it is most commonly used on the daily chart. When using this strategy, traders will typically set a target price at which they will sell the stock once it fills the gap.
There are a number of reasons why stocks may gap up or down, including earnings releases, analyst upgrades or downgrades, news events, or even just general market momentum. The key for traders is to identify stocks that are gapping on high volume and then wait for the gaps to fill.
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Gap Fill Trading Strategies
The term “gap fill stocks” is a bit misleading. It sounds like a simple stock trading strategy, where you buy stocks that have gaps in their price chart. But the reality is much more complicated than that.
There are two types of gaps in stock prices: common and breakaway. Common gaps happen all the time and usually don’t mean anything. They’re just brief pauses in the price action as buyers and sellers come to an agreement. Breakaway gaps, on the other hand, can be significant.
They often signal a change in trend or momentum, and they can offer clues about future price movement. So, while it’s true that you can buy stocks that are gap fill candidates, it’s important to understand the different types of gaps and what they mean before you start trading.
As we have established, the fill the gap strategy is a way to trade stocks to take advantage of temporary price discrepancies. These gaps can occur for a variety of reasons, but are usually the result of news or earnings releases.
The idea behind the gap fill strategy is to buy shares of a stock that has gapped up (or down) in price, and then sell them once the price has returned to its pre-gap level. This type of trade can be profitable if timed correctly, but it can also be risky if the stock does not return to its previous level.
To be successful with this strategy, it is important to have a clear understanding of why the gap occurred in the first place.
Technical analysis can be used to trade stocks that are filling gaps. Some technical indicators, like Bollinger Bands, can help identify when a stock is overbought or oversold. This information can be used to trade stocks that are filling gaps when you use technical analysis.
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Factors to Consider When Trading Gaps
There are several things that investors need to consider before buying a fill the gap stock.
The first thing is to research the company and find out why the stock price has fallen. If there is a valid reason for the decline, such as poor earnings, then it may not be a good idea to buy the stock. However, if there appears to be no reason for the decline, then the stock may be a bargain.
The second thing to consider is the price at which the stock is trading. If the stock is trading at a price that is significantly below its 52-week high, then it may be a good value.
The third thing to consider is the trading volume. A fill the gap stock that is being traded heavily may be more likely to rebound than one that has low trading volume.
Finally, it is important to use stop-loss orders when buying fill the gap stocks. This will help limit losses if the stock price continues to fall.
When done correctly, investing in fill the gap stocks can be a profitable strategy. However, it is important to do your homework before buying any stock, and to use stop-loss orders to limit losses.
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Conclusion
In order to trade gap fill stocks successfully, it’s important to understand the different types of gaps and what they mean. Common gaps can provide clues about future price movement, while breakaway gaps often signal a change in trend or momentum. If you’re planning on trading gap fill stocks, it’s important to have a clear understanding of why the gap occurred in the first place.
When done correctly, the fill the gap strategy can be a profitable way to trade stocks. However, it is important to remember that this type of trade can also be risky if the stock does not return to its previous level.
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David Fortune has been the editor NoBSIMReviews.com since 2019. He is an expert at writing content on stock advisory services, side hustles, reviewing online business opportunities and many more topics. You can learn more about David on our about us page.