Explanation of gapping up/down

[robster970]

I noticed towards the end of yesterday on Rio Tinto in FTSE that there was a lot of volume as it settled around the 2200p mark. I kind of assumed that it would carry on south today as it had for the last couple of days.

On opening though, it gapped up hitting a peak of about 2275 before resuming it's southbound course.

Does gapping up/down occur as a result of novice traders setting orders to open that cannot be immediately filled on market open or is it more complex than that? There wasn't much volume so I kind of assumed that the behaviour was not as a consequence of bigger outfits desperate to buy in.

 

[MrGecko]

The Gap represents the change in the markets view since the close... Supra Nationals are often listed on more than one exchange (and I think the shares are fungible?) - so if Rio rallied at the end of the US session and into the Asian, there will be some price that Rio should open at in London - otherwise there would be arbitrage opportunities.

Also (out of my depth here), the Dark Liquidity pools will also have an effect, right? For example, if Rio continued to trade on Chi-X after the LSE close, that should be considered the current market price (?)... hopefully someone else will add something, I don't really know FA about how equities work.

As a general rule, though, the gap will reflect the news since the market close. There are well known gap trading strategies about, I'm sure you could find one with a bit of Googling.

 

[NetTecture]

It happens due to an inbalance, which may have many reasons. People being absent and waiting may mean relatively small orders MAY move the market already. Seems that was the case in your case

 

[robster970]

Dark Liquidity? That sounds menacing and a bit Dr Evil'ish.

As one of the novices, I should have took the money and run at 2275 instead of getting out at break-even when I realised it was going south again.

You live and learn. Seems I have tons to learn. Every day I end up with more questions than I do answers right now.

 

[Strangelydifferent]

Does anyone know of trading setups that have been found workable relating to gapping?

It seems rather scary to me, however I had noticed that vodafone in the LSE has gapped up six days in succession and yet drifted down and closed lower in the last four of the same six days.

My novice's guess is that this means that some market makers think its worth their while to try gapping up to see what happens and after a while they will get tired of it.

Any thoughts?

 

[raysor]

Does anyone know of trading setups that have been found workable relating to gapping?

It seems rather scary to me, however I had noticed that vodafone in the LSE has gapped up six days in succession and yet drifted down and closed lower in the last four of the same six days.

My novice's guess is that this means that some market makers think its worth their while to try gapping up to see what happens and after a while they will get tired of it.

Any thoughts?

If the stock trades in America as ADR then the closing price will be a lot different to open. There is an auction at the close and an auction at the start so OBVIOUSLY there will be a gap. And, of course as someone said, news overnight affecting the stock/sector.
Just imagine yourself making a market. What would you do? Try it with your friends!

 

[robster970]

Just imagine yourself making a market. What would you do? Try it with your friends!

I'll bear that entertaining suggestion in mind for the weekend.

"Shall we go for a pint or shall we make a market?"

 

[raysor]

I'll bear that entertaining suggestion in mind for the weekend.

"Shall we go for a pint or shall we make a market?"

Or both. Loser pays (as usual)