i understand the technical defination of a GAP. Basically, when a share trades in a new range the next day with no overlap is market share price. Correct me if im wrong? However, what is the significance of this. Okay, maybe some SENS announcement could have caused this - but what should it mean to a trader? Is it a buying opportunity or a a signal to dump a share?
they are of little significance unless you are a day trader. There are no statistics that prove that they are likely to be filled - period! But there are very effective strategies for trading them, if you know what you are doing. Note that the JSE is not condusive for trading gaps in shares - only index futures (and again this does not include warrants or STX40 futures.
A gap is a change in price levels between the close and open of two consecutive days. Most technical analysis manuals diferentiate between four types of gap patterns namely Common, Breakaway, Continuation and Exhaustion. However, these labels are only applied after the chart pattern is established. That is, the difference between any one type of gap from another is only distinguishable after the stock continues up or down in some fashion. Although these classifications are useful for a longer-term understanding of how a particular stock or sector reacts, they offer little guidance for trading.
Use GAP trading in day trading on indices. On the TOPI there is about a 60% probability that a Gap is filled on the day it is created. The phenomena is that traders long, when a gap is up, will sell to take profits and aim for a lower entry. Traders short, will buy at the new level, and traders not in the market will sell ... etc. Which drives the gap to close. There is a further 30% probability that a gap not closed on the day of trade will close the next day - thereafter the probability is that the gap will break away into a further rally.
Frequency is not consistent - for STX, pull up a 5 year graph, and then do yourself a back-test on the stats for the closes, and more importantly, check if the gaps that do close, close completely - if you are planning to trade them.