What is Gap Up and Gap Down in the Strock Market

Synopsis:

Gaps are differences in the stock prices at the opening and the previous day’s closing of the market. Analyzing gaps can help in understanding the existing trend, momentum of the trend, market volatility, and growth potential of stocks. Gap-up occurs when stock prices increase above the previous day’s closing price on opening, while Gap-down is when opening prices are lower than the previous day’s closing price.

Stock prices move throughout the market timings, however, two of the most important prices that every trader checks are the opening and closing prices, and the gap in the stock market refers to the difference between these two prices. If you are into stock trading, you must have heard about gap-up and gap-down concepts in stocks. If not, this article will explain the concepts and how they work, the differences between gap-up and gap-down, and more.

What is the Gap up and Gap down in stock market trading?

A gap in the stock market is the difference between the closing price of the previous day and the opening price of the next day. However, the difference needs to be significantly high or low and then the market calls it a gap.

A gap-up occurs when a stock opens at a price significantly higher than its previous day’s closing price. For instance, suppose a stock closed at ₹ 100 yesterday, and today when it opens, the price at the opening is ₹ 105, so there is an upsurge of ₹ 5 or 5% in the stock and this is the gap-up concept in stock trading.

On the contrary, when a stock price opens at a price lower than the previous day’s closing price then it will be referred to as a gap-down. Taking a cue from the above example, if the price of the stock opens today at ₹ 95 down from the previous close of ₹ 100, then there will be a gap-down of 5%.

Understanding Gap Up

To understand Gap-up in the stock market better, let's break it into two different types or levels of gap-up.

• Partial Gap-up: This is when the opening price only exceeds the closing price of the earlier trading session. For this, you can refer to the above gap-up example when the stock price only goes up over ₹ 100 closing price of the earlier trading session.

• Full Gap-up: It occurs when the opening price of a stock not only surpasses the previous day’s closing price but also the high price. For instance, the stock mentioned in the example above, had a high price of ₹ 110, now today if the opening price was higher than ₹ 110 then it will be referred to as a full gap-up.

Understanding Gap Down

Similar to gap-ups, for a better understanding of gap-downs here are its two levels -

• Partial gap-down: This is when the price at the opening only drops below the previous day’s closing price.

• Full Gap-down: When the opening price of the day plunges below the low price of the previous day, then it is referred to as full gap-down. As per the above example, if the stock prices today opened at ₹ 90 when the previous day’s low price was ₹ 92 then it will be known as a full gap-down.

So what this gap-up and gap-down indicate in the market is something you must be wondering now. Coming to the use of these concepts is mainly for technical analysis when a gap-up indicates bullish sentiments in the market and the interest of buyers in buying the stock is rising. A full gap-up often indicates potential for growth in the company and in turn, a rise in stock prices significantly. It also suggests whether investors are optimistic about the stock and its prospects or not.

Similarly, a gap down indicates market uncertainty driven by any or multiple of these reasons –

• Geopolitical events
• Economic downturn
• Domestic political events.

Gap-down also indicates bearish sentiments in the market, whether interest dropped or not, and also suggests investors losing interest in the stocks.

Use of Gap in Technical Analysis

To understand how the gap can be used in technical analysis, we need to dig a little deeper.

There are four different types of gaps that technical analysis categories –

1. Breakaway Gaps: When gaps occur at a stage of the stock breaking a consolidation range, then it indicates a new trend beginning.
2. Exhaustion Gaps: These gaps start occurring when the trend is also at its end and it signals towards reversal of the trend.
3. Runaway Gaps: When gaps occur within an established trend it indicates that the trend is gaining momentum.
4. Common Gaps: These are usual gaps that occur daily and are of less significance.

Difference between gap up and gap down

Conclusion

Gaps in the stock market have always been an important concept that traders and technical analysts use for gauging the markets. From analyzing whether the market is in a bull run or bear run, gaps also help in understanding the trend’s momentum, and trend reversal which are crucial for building trading strategies.