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Written by : Joie Gelvin |
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my name is jeffrey kennedy editor of traders classroom in this episode we're going to be discussing price gaps and the types of information that a price gap actually offers first i want to explain exactly what a price gap is a price gap forms on your charts whenever one period or one day's worth of trading does not incorporate the range of the prior bars trading notice between these two bars this one and this one there's no overlap between the ranges of those two price bars so the end result is a vacant space on your price chart this is what a price gap is now it seems kind of simple to begin with but a price gap can actually offer us as analysts and traders a ton of information for example if i look at the markets from an elliot wave perspective price gaps are quite useful there are four types of price gaps common breakaway acceleration and exhaustion where these gaps occur can aid the electrician and identifying the substructure of a developing impulse wave for example in wave one here we have a breakaway gap and then later on that occurred earlier this month of january we saw an acceleration gap this is blackberry now price gaps can also identify significant reversals of trend for example this is virgin galactic holdings ticker symbol is s-p-c-e and you'll notice between december and january we saw two types of price gaps or actually two gaps one was a gap to the downside and then in january we saw a price gap to the upside well this left behind a chart pattern that old school technicians refer to as a bullish island reversal so this is how a price gap again at first glance it seems quite a simple type of chart formation it contains a ton of information whether you're looking at the market from an elliott wave perspective or simply looking for those significant turning points in a particular market another thing that gaps offer us would be trading opportunities now this is a classic trade setup using or based on price gaps that i talked about in trader's classroom called the closing the gap trade setup this occurs whenever you see prices gap up in one direction and then shortly thereafter we move back into the range of the bar preceding the gap we see this here in apple it occurred in late november and then again it occurred early in january now one stock that i'll be talking about next week in trader's classroom is a stock that does indeed have an island reversal so if you'd like to learn more simply tune in next week thank you
Thanks for your comment Sulema Okutsu, have a nice day.
- Joie Gelvin, Staff Member
so where does this buying and selling pressure come from well it comes from investors but there's two different types of investors there's retail investors and there's institutional investors now a retail investor someone that does not trade the stock market as a professional they're there everyday people there's someone just investing for themselves and a small amount of the overall buying and selling in the stock market is performed by retail investors most of the buying and selling pressure most of the buying and selling every day is done by institutional investors and an example of an institutional investor is is someone investing other people's money like a hedge fund or a pension fund mutual fund anything like that so why does this matter well institutional investors can move stocks very quickly they have a lot of money and they can buy a lot of stock quickly or they can sell a lot of stock quickly during regular market hours and regular market hours if you're not familiar 930am till four o'clock p.m. eastern standard time or new york time monday through friday of course they're not open on holidays or certain days might be a half day where the markets open 930am till one o'clock p.m. but for the most part 9 30 a.m. to four o'clock p.m. is a normal trading day but perhaps you've heard about the pre-market the pre market is between nine o'clock a.m. and 930am and institutional investors can actually buy and sell stocks before the market even opens most retail investors they don't have the opportunity to purchase and sell shares in the pre-market and the exact same thing occurs in the after hour the after-hours is after the market closes after 4pm the after-hours is between 4pm and 8pm and institutional investors they can do some buying and selling during that time retail investors not so much and why that is important is it can create gaps from this after-hours buying and selling pressure or the pre market buying and selling pressure let's take a look at a gap down example let's take a look at joy Global Inc so we can see end of november the stock closed around fifteen dollars twenty-five cents just as an approximation we can see the first day of december the stock open for trading $14 around 50 cents and it went down from there lots of selling pressure the selling pressure exceeded the buying pressure in this situation and as as a new investor what you want to realize is the markets can move very quickly and just because a stock closes at fifteen dollars twenty-five cents it doesn't mean the next day you can necessarily get fifteen dollars and twenty-five cents know the next day in this case the maximum you could have got was only about fourteen dollars maybe forty cents or thirty cents like you can lose a lot of money quickly with a gap down situation the gap down situations they're caused by institutional investors at the same time there could be a gap up situation here's a stock terraformed power inc the stock closed end of the month november around seven dollars and the stock opened for trading around eight dollars so there was lots of buying pressure after hours in the pre-market and the stock took off from there so it goes both ways of course if you're long a stock and gap up situations great you're short a stock a gap down situations great but you got to be very careful because these institutional investors are very powerful
Thanks Frauenhubh your participation is very much appreciated
- Joie Gelvin
About the author
I've studied environmental engineering at Indian River State College in Fort Pierce and I am an expert in agrology. I usually feel ditzy. My previous job was brokerage clerk I held this position for 20 years, I love talking about couponing and mountain climbing. Huge fan of Tina Turner I practice wakeboarding and collect premiums.
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