Filling the gapsWhen the stock price moves back to its original...

Filling the gaps

When the stock price moves back to its original pre-gap level, the gap is said to have been filled. Breakaway gaps and runaway gaps generally have lower chances of getting filled. This is because it is assumed that these gaps are formed due to events that have strong directional momentum. Thus, trading a gap-fill equals trading against this momentum and the newly formed trend. When a gap gets filled on the same trading day on which it occurs, it is called fading. The filling of gaps happens because of many reasons. The first is due to irrational exuberance, which means that the initial spike in stock price might have been very optimistic or pessimistic, which then invites a correction. A gap-fill also occurs due to technical resistance, that is, when the price of a stock rises or falls sharply, it does not leave behind any support or resistance. Gaps matter a lot in profit or loss from a trade. It is important to note that if a trader is unable to identify a gap and react to it, he is likely to miss the opportunity to get in or out of a good trade.