A stock gap refers to when a stock opens trade at a price that is significantly lower or higher that at which it closed during the previous day of trade. It also refers to an area on a chart that shows the price of the stock moving significantly higher or lower, while the amount of trading in between those changes has been little or none.

Technical analysts will identify certain types of gaps that they use to track the movements of stocks as it is believed that the stock will eventually move to close the gap.

Analysts have differing opinions on what criterion exactly defines a gap, and there are practically hundreds of different theories on what exactly constitutes one. The difficulty lies in correctly identifying a real gap and the basic criterion is when a stock is trading at significantly different prices from when it closed.

A gap up refers to a stock that is trading higher than its previous day's trading price while a gap down refers to one that is trading lower. There is massive opportunity for investors to make profits in both gap up and gap down situations.

Different Types of Stock Gaps

Different types of stock gaps have been identified and they can be associated into 4 basic types based on the charts. Breakaway gaps are those which signal the beginning of a new trend and will usually occur at the end of a price pattern. Exhaustion gaps signal an attempt to reach new highs or lows toward the end of a price pattern on the chart.

Common gaps are those that show an area where the price of a stock has moved without a specific reason. They do not actually fit in with a price pattern. Continuation gaps will occur along the middle part of a price pattern and will testify to the entrance of a large amount of buyers or sellers who are responding to some anticipation of the stock's future movement.

How You Can Trade Gaps for Profit

There are many advanced as well as simple strategies that have been formulated concerning trading gap stocks successfully. When a gap up is moving continually upward, eventually it reaches the point where it stops doing so and undergoes a price reversal in order to fill the gap. Analysts assume that it is at its lowest point, from which it will again rise.

For many analysts and investors, they believe that this would be a good time to buy shares for an expected future profit.
In the opposite case, when a gap down stock continues moving downward, it reaches the point where it changes price direction in order to fill the gap. At this point, it is believed to be at its highest point, from which it will once again drop.

Of course, this is considered to be a good point to sell your stocks for a handsome profit.

Idea from Independent Investor