Recently I have conversed with my younger brother, Denis, about the matter of "The GAP" ; We call him "the Northern Wolfman" because he lives in the cold Minnesota tundra. At first, Denis thought that "The GAP" was the store---and one he did not frequent much because the clothes did not fit real well.
"The GAP" is the when a stock opens trading up sharply or lower sharply and because the trading is not orderly, it gaps down leaving a blank spot in the "chart". This "gap" becomes visual notice that something is up. This would be like you noticing that your neighbor has 25 cars in the driveway. Something is up. It might be a party. Whatever.
The gap results from an inbalance in orders and by very definition this is where traders can make money. Volatility is opportunity.
The transition of the markets to being "global" has led to a problem-----if markets gap down overnight in Europe or Asia, if an investor has placed a "sell stop" order below the trading price of his investment, the sell order will execute, but not at the price intended, but at the "first trade" of the day on the exchange. Because that could only be a momentary plunge, many experienced brokers do not recommend use of sell stops, or at least resist the impulse to use "tight stops" because there might be an unintended result---the stock could plunge on opening, taking the investor out of the stock, and then go back up, leaving the investor a needless loss and needing to buy back in.
Technical traders who follow graphs and such ascribe all sorts of inferences to "gaps" and if one is interested in volatility, it is worthwhile reading up on this.
Some reflective words on the art of trading....in business, stocks, or ...anything.....and in the spirit of the Book "The Tao Jones Averages," why whole brain analysis is critical whether in the rush of the bull, or the panic of the bust. This blog is an archive blog for prepublication of a small booklet.
