A majority of stock markets operate between pre-defined trading hours. For instance, a certain market may open at 9:00 am and close at 5:00 pm. If on the opening of the market the price of a particular counter is different from the one than was there at the close of the previous trading session, then that’s when it is said that the market has experienced a gap.

It is rendered a “gap” because on the trading chart, there will be a blank space (gap) between opening and closing prices. The lack of the opening and closing prices is due to events that took place while the market was closed, such as press releases, profit warnings, takeover bids and other news stories. Market gaps might also be caused by traders placing bids after the market closes that will take effect as soon as the market re-opens. Gapping up happens when the market opens at a price that is higher than the previous day’s high. If the previous day high was 100 and the market opens at 120, there would be a 20 point full gap up.

Gaping down occurs when the market opens at a price that is lower than the previous day’s low. Gapping up and down in the market can be a great trading strategy, depending on where you are positioned. The causes for these gap movements are simply supply and demand. If the market is inundated with numerous buy orders before the start of trading, the prices will move up to ensure that there will be enough sellers to balance the market. Likewise, if there are many orders to sell, the price will be lowered so as to find enough securities buyers.

Trading on these gaps is potentially lucrative for traders, but this strategy is one that requires time as the trading landscape can change in a vey short amount of time. Perhaps the best way to go about trading during gaps would be to paper trade first, and see whether targets are being met, before leveraging the trading strategy online.

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