In the stock market, a “gap” refers to a situation where a stock’s price moves sharply up or down, without any trading occurring in between. A common gap is one of the most frequent types of gaps traders encounter. It typically occurs when a stock opens at a price significantly higher or lower than its previous closing price. This happens without any major news or events to explain the move.
What is a Common Gap?
A common gap is usually a small gap that happens frequently and is not driven by major news or earnings reports. It often appears in a stock’s price chart due to normal market fluctuations. These gaps are often filled quickly. This means that the price of the stock tends to move back to the previous day’s closing price soon after the gap occurs.
These are generally seen in stocks that have stable, predictable price movements and are not subject to extreme volatility. These gaps are more likely to happen during times of low trading volume. It can also happen when the market opens after a break, such as on Monday after the weekend.
Reasons for a Common Gap:
Common gaps are often caused by regular daily fluctuations, such as:
- Small news or earnings reports: These don’t cause major shifts but can still affect the stock price slightly.
- Routine market fluctuations: In a busy market, stocks often open slightly higher or lower than they closed the previous day.
- No major news or catalysts: Sometimes, stocks move with minimal impact, and the gap is just part of normal market behavior.
Example of a Common Gap:
Let’s say a company, closed at ₹50 per share on Monday. On Tuesday, the stock opens at ₹60 per share due to an increase in buying interest. But there is no major news or announcement from the company. The ₹5 difference between Monday’s close and Tuesday’s open creates a gap in the chart.
In this case, the gap is considered a common gap because it is not the result of any major news or change in the company’s situation. After a few days of trading, the stock may return to its previous level, filling the gap. For instance, the price might fall back to ₹50 as traders who missed the initial move start to sell.
Why Should You Care About Common Gaps?
While they may not seem as exciting as the big, attention-grabbing gaps caused by major news, common gaps still tell us a lot about the market. hey reflect the usual ebb and flow of investor sentiment. Understanding how these gaps work can also help make better decisions in short-term trading. Most importantly, knowing that these gaps tend to fill quickly can take some of the mystery and worry out of market movements.
Conclusion:
In the world of stocks, not every gap is a sign of something huge. Sometimes, it’s just the market taking a small step in a new direction – only to retrace its steps again soon after. Keeping an eye on those gaps helps you see how the market corrects itself over time.
– Ketaki Dandekar (Team Arthology)
Read more about Common Gaps here – https://www.investopedia.com/commongap.asp.