A market gap is an opportunity to create and sell something that is currently unavailable. Consumers, on the other hand, want it. The term “gap” refers to the difference in supply and demand for a particular product. In other words, it refers to a consumer demand that has yet to be met by supply.
For businesses, a market gap represents an opportunity to expand their customer base. You can achieve market penetration by identifying and filling a gap in the market.In the market, there is a void in terms of attributes.
At least one of the following characteristics characterises a market gap
- It’s something unique. To put it another way, it’s brand new; there’s nothing else like it on the market.
- It is already in existence. However, an upgrade or enhancement would significantly increase sales.
- The item is already on the market. Nobody, on the other hand, has tried to sell it in a new market. If it were introduced to a new market, its sales would skyrocket.
Basics from Gap
Gaps appear as a result of underlying fundamental or technical issues. If a company’s earnings are significantly higher than expected, the stock may gap up the next day. This indicates that the stock price opened higher than it closed the previous day, resulting in a gap.
It is not uncommon for a report to generate so much interest in the forex market that the bid and ask spreads widen to the point where a significant gap can be seen. Similarly, a stock that makes a new high in the current session may gap up higher in the following session for technical reasons.
Gaps are divided into four categories
- At the end of a price pattern, breakaway gaps signal the start of a new trend.
- Exhaustion gaps appear near the end of a price pattern and indicate a final push for new highs or lows.
- Common gaps aren’t part of a price pattern; they’re simply areas where the price has shifted.
- Continuation gaps, also known as runaway gaps, appear in the middle of a price pattern and signal a stampede of buyers or sellers who all believe the underlying stock will go in the same direction.
Strategy of advantage in gap
When you discover a market gap, the following step is to decide whether you should take advantage of it. Most business prospects have four components that must all be present at the same time. The four elements are as follows:
- This product or service must be in high demand, i.e., there must be a need for it. There is demand if you find a gap in the market.
- You have the resources necessary to meet this demand.
- You know how to put the resources to work to meet the need.
- There is a way to profit. To put it another way, it is profitable.
There’s a strong probability you’ll succeed if the gap you found looks to have these four elements. However, if one of the elements is missing, proceed with caution or seek a different partner. A partner in this context refers to someone with whom you might start a business.
How to finally take the Advantage of the Gaps
There are a variety of tactics for exploiting these flaws, with a few being more popular than others. When fundamental or technical reasons point to a gap on the next trading day, some traders will purchase. When a positive earnings report is announced, they might buy a stock after hours in the hopes of a gap higher the next trading day.
At the start of a price movement, traders may purchase or sell into extremely liquid or illiquid positions, hoping for a good fill and a continuation of the trend. They may, for example, buy a currency when it is rapidly rising on little liquidity and there is no strong overhead barrier.
Some traders would fade gaps in the opposite direction once a peak or low point has been discovered (often through other forms of technical analysis).
For example, if a stock rises sharply in response to a speculative report, skilled traders may short the stock to close the gap. Finally, after the gap has been filled, traders may buy when the price level reaches the previous support.
Here are some crucial points to keep in mind when trading gaps:
- Because there is generally no immediate support or resistance, once a stock begins to fill the gap, it rarely stops.
- Exhaustion gaps and continuation gaps both anticipate price movement in opposite directions, so be sure you classify the gap you’re going to play appropriately.
- Retail investors are the ones that normally demonstrate irrational exuberance; however, institutional investors may join in to boost their portfolios, so be cautious when utilising this indication and wait for the price to start breaking before taking a position.
- Keep an eye on the volume. Breakaway gaps should have a high volume, while exhaustion gaps should have a low volume.
Those who investigate the underlying causes of a gap and accurately identify the sort of gap can often trade with a high probability of success. However, there is always the possibility that the trade will go wrong.
You may first avoid this by keeping an eye on the volume and real-time electronic communication network (ECN). This will show you where the various open trades stand. If you find high-volume resistance keeping a gap from being filled, double-check your trade’s premise and consider not trading it if you’re not sure it’s right.