What does it mean to “Gap up” or “Gap down”?

What is the definition of a gap up or gap down? Frequently referred to as gapping.

Definition: Gapping

Gapping occurs when the price of a stock, or other asset, opens above or below the previous day’s close with no trading activity in between.  

Origin

Gapping has its origins in technical analysis or reading charts.

A gap is the area discontinuity in a security’s price chart. Gaps may materialize when headlines cause market fundamentals to change rapidly or during hours when markets are typically closed. For instance, the result of an earnings call after-hours.

In online forums users will frequently post comments while the markets are closed. Investors will comment about their desire for a stock to gap up on open. Occasionally it happens, but oftentimes it is only wishful thinking.

Many investors that purchase a stock while in a state of FOMO hope for a gap up the next trading day. More times than not, the stock gaps down on market open and the FOMO trade is confirmed as a failure.

Alternatively, sometimes buying a gap up leads to further gains. As a stock gains momentum as the trading day goes on, the price continues to soar.

Another scenario is buying a gap down. Sometimes this is also referred to as buying the dip, in hopes that a stock will increase in price throughout the trading day.

Gapping is exciting in either direction. It can lead to solid gains or heavy loses. An unfortunate scenario to find yourself in is holding a stock over the weekend as bad news drops about a stock that you have YOLO’d your 401k into. A gap down is likely in the morning and it may be recommended to sell and invest your remaining funds into $ROPE.

Examples

”Great gain with the gap-up this morning. Took some profits, but am planning on buying the inevitable dip.”

“We’re gonna gap up hard tomorrow or the next day!”

“What do I do after a gap down? Help!”

An image with the words hashtag gap, referred to as gap up or gap down
Gap ups are incredible if you are holding, gap downs hurt unless you are short.

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