📊 Liquidity Gaps CheatsheetIn volatile markets, traders can benefit from large jumps in asset prices if they can be turned into opportunities. Gaps are areas on a chart where the price of a stock (or another financial instrument) moves sharply up or down, with little or no trading in between. As a result, the asset’s chart shows a gap in the normal price pattern. The enterprising trader can interpret and exploit these gaps for profit.
📌 What is a gap?
A gap occurs when the price of a security moves quickly through a price level, either up or down, with little trading or pricing available over that time span.
📌 How they are formed
Gaps can be caused by several factors, but they are mostly seen as a result of unexpected news or a technical breach of support or resistance.
🔹 On the fundamental side , the news could be a company beating earnings estimates by a large margin, or a speech by a Federal Reserve (Fed) official impacting interest rate expectations.
🔹 On the technical side, gaps can ensue following the break of a prior high/low, or other form of technical resistance or support, such as a key trend line.
💥 Key Takeaways About GAPS
🔹 Gaps are spaces on a chart that emerge when the price of the financial instrument significantly changes, with little or no trading in between.
🔹 Gaps can occur unexpectedly as the perceived value of the investment changes, due to underlying fundamental or technical factors, such as an earnings disappointment.
🔹 Gaps are classified as breakaway, exhaustion, common, or continuation, based on when they occur in a price pattern and what they signal.
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