- Types of Gaps
- A Note on Terminology
- How to Use Gaps in Trading
This chapter is from the book
This chapter is from the book
This chapter is from the book
A Note on Terminology
This book focuses on daily charts and trading. To clarify, we use Day 0 to represent the day a gap occurs (see Figure 1.6). The day before the gap is Day –1 and the stock’s high on Day –1 is the beginning of the gap. On the next day (Day 0), the stock’s low exceeds the high on Day –1, forming the gap. We refer to the day of the gap as Day 0 because we do not know until the close of trading that day whether we simply have an opening gap or if we have a gap that remains unfilled.
If we are to make trading decisions based upon the occurrence of a gap, the soonest we would be able to enter a position is the open on Day 1. Thus, when we report a 1-day return, we base the return calculation from the open on Day 1 to the close on Day 1. To calculate longer returns, the return is calculated from the open at Day 1 to the close on the day of the return length; therefore, a 3-day return is calculated as buying at the open of Day 1 and selling at the close of Day 3.
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Figure 1.6. Gap occurs on Day 0