A common gap is a type of stock market that appears in quotes and has no analytical interpretation.
This type of stock market has no interpretation. It usually originates in the opening. While it is true that it can originate at other times that are not necessarily openness. For example, in the dividend distribution.
Clarifying the above, we can say that the opening hole is a type of common hole. In fact, worth the redundancy, is the most common.
Common Pit Features
A common hole is characterized by a series of points that differentiate it from other types of hole.
- It closes in the vast majority of cases:It is very common for them to close but it is not an unbreakable rule.
- It has no meaning:That is, it is hardly relevant in the evolution of stock market movements.
- It can occur at any stage of the stock market trend:However, the most common is to find them in lateral movements or corrections, and even during a trend.
Below is an image pointing to common holes:
Some holes have not been pointed out because they were very small and because if we all marked, the graphic would be full of red lines. However, the above image serves to illustrate the figure of the common hole.
Types of common hole
Within the common gaps we can differentiate between several types:
- Dividend Gap:When a company distributes dividends , its price opens with a bearish gap the size of the dividend distributed. For example, an action that trades at $ 10. If you distribute a dividend of 0.5 dollars, that day will open to 9.5 dollars.
- Openinggaps : It is the most common opening and is caused by the opening auction (auction that takes place before the general opening of the market, usually half an hour before).
- Volatility auction gap:Normally when the volatility of a stock increases greatly during a session (above the allowed range) the quote is suspended and an auction is held to establish a new price. That auction is known as a volatility auction. In the reopening there may be gaps.
- Action split or counter-splitgap : A share split or counter split split occurs when this type of operation is performed by the listed company. See share splitting | See counter split .
Trading with common holes
The operation that is usually carried out with the common holes is what is known as the hole closing operation. Taking advantage of its main feature (most of the time they are usually closed completely), they are used to operate in favor of closing the hole.
This strategy is well known with common opening gaps. Of course, like every strategy, it has a percentage of success and a percentage of error. The biggest risk of this strategy is that the gap, even if it is a common hole, does not close. If we blindly trust its closure we can incur considerable losses.
With which, in any case, it is essential to use a stop loss order and carry out proper monetary management .
Next we will show two examples in which the gap closes but the movements are very different.
In the previous image, the price closes with hardly any movement against the gap. In addition the gap closes excessively. If we had introduced a short position , we would have made a profit.
In this second example, the price moves against and does not close completely. Thus, if we had introduced a short position, our position would have been in losses for a long time.
That is why we must always cover ourselves against the risk (using stop loss) that the movement is not as we expect. How do I know when I should take a position in favor of the gap? There is no rule to operate a gap. If the trader decides to carry out this strategy, he must build a trading system.
There are traders that operate the gaps based on technical indicators , others of chart figures and others perform quantitative analysis to determine the probability of closure based on the volatility and size of the gap.