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Gaps seriously defy my understanding of trading.


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Gaps seriously defy my understanding of trading.

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  #1 (permalink)
Chicago IL
 
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Here is my understanding kindly please correct / advise me.
It takes 2 to trade. Buyer wants to buy @ low & seller wants to sell @ high. Now due to market emotions buyer can buy higher but at the next available seller's price or sellers can sell lower at next available buyers price.
My understanding is this is what moves the market.
Now between sessions (or sometimes during seasons) although the market depth indicates a small spread between buyers bid & sellers ask there is a HUGE gap sometimes. It seems like the buyer(s) bought at a much higher price than the closest seller selling. Even if there was quantity difference, as per first in queue closest to asking price needs to be filled first meaning trade occurred.
In other words the most gap that can occur is the spread between the bid & ask. But we still see a HUGE gap in the market. How could this happen?
I don't think market orders explain these gaps either. Can some explain the concept of gap please.

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  #3 (permalink)
Market Wizard
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thinkfuture View Post
Here is my understanding kindly please correct / advise me.
It takes 2 to trade. Buyer wants to buy @ low & seller wants to sell @ high. Now due to market emotions buyer can buy higher but at the next available seller's price or sellers can sell lower at next available buyers price.
My understanding is this is what moves the market.
Now between sessions (or sometimes during seasons) although the market depth indicates a small spread between buyers bid & sellers ask there is a HUGE gap sometimes. It seems like the buyer(s) bought at a much higher price than the closest seller selling. Even if there was quantity difference, as per first in queue closest to asking price needs to be filled first meaning trade occurred.
In other words the most gap that can occur is the spread between the bid & ask. But we still see a HUGE gap in the market. How could this happen?
I don't think market orders explain these gaps either. Can some explain the concept of gap please.


The gap occurs under several conditions.


(1) Markets can not be traded 24/7. There are technical breaks. US stocks can only be traded during the day, as there is no night session. News released during the night or the early morning can shift the value of a stock away from the closing price of the prior session. The opening auction for the stock opens with a gap.

You need to know when there is a continuous auction, when there is an opening or intraday auction (continuous auction halted) and when the market is closed.

(2) During a news release you may see an intraday gap on a chart. This can happen, if a large market order has taken out several levels or the order book at once, and if this large market order happens to create the first tick of a new bar. This is more common on range and volume charts than on minute or tick charts.

(3) If you exclude night session data from your chart by only displaying the regular trading hours, there may be a gap on your chart. The gap occurs, because you have decided not to display all data.


When traders talk about "trading the gap", they usually refer to charts that do not included the night session. This can be due to (1) in case that the financial instrument could not be traded or to (3) in case that you exclude the trade data.

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  #4 (permalink)
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Also just on movement, sometimes several markets overlap for a time, one might be closing causing movements in others, there is news flow, they eat lunch etc... always something going on

"but trade the gap" what Fat Tails said....

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  #5 (permalink)
Chicago IL
 
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I'm not talking about overnight sessions when other markets are open. I'm talking about when a session open (exchange re-opens for the day after settle)
For example Crude oil closes at 4:15 PM CST for settling & opens at 5 PM CST. The session open at 5 PM opens with some arbitrary gaps & I'm unable to understand the theory behind these gaps.

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  #6 (permalink)
las vegas
 
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Here's an article, I didn't read it, but it looks pretty long so it must be good. The Winning Investor : What Are the Three Types of Price Gaps? :: Quick and Dirty Tips

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  #7 (permalink)
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Is it possible to know the price before the open and how? Gapped or not.

I can only see last traded price from the last session.

I trade Eurex (Bunds) and ES and DOW futures.

/J

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