A price gap occurs when the opening price of a security is significantly higher or lower than the previous day's closing price, creating an empty space or "gap" on the price chart. This gap happens without any trades occurring between the two prices, which can be a result of various factors such as news, earnings reports, or other major events that affect market sentiment outside of regular trading hours.
For example, if a stock closes at $50 on Monday and then opens at $55 on Tuesday, with no trades between $50 and $55, a $5 gap would appear on the chart. The price "jumps" from the Monday close to the Tuesday open, leaving a space between these two prices.
Significant News: Major announcements like mergers, acquisitions, or geopolitical events can cause a sharp shift in market sentiment, leading to price gaps.
Earnings Reports: When a company releases earnings reports after market hours or during the weekend, it can cause a gap in the price when the market opens.
Economic Data: Important economic news or data releases, such as interest rate changes or inflation reports, can trigger sudden price movements.
Volatility: Gaps often reflect heightened volatility and can present opportunities or risks for traders.
Trend Reversals or Continuations: Depending on the direction of the gap, it can signal a potential trend reversal or continuation.
Technical Analysis: Traders use gaps to make decisions, as gaps can sometimes indicate areas of support or resistance in the price chart.
By understanding how price gaps work and the factors that cause them, FNmarkets users can better navigate market movements and make informed trading decisions.