The close of the benchmark indices or stocks in particular has a variance to a degree from the opening price on the next trading day; this is what in the language of stock market is referred as a gap. And if the opening price is higher than the yesterday's closing price or if lower than it results in a gap-up or gap-down respectively.
Gap in price : Primarily a zone during which no trade has been executed and is the phase between the previous day's close and the beginning of next day's trading session.
Cause of gap creation: A number of factors or the developments during the night play in such movement in stock price in either direction. It can either be result announcement or some substantial piece of news which moves the price of the stock or a simple result of market direction.
Strategy for trading with such gap-ups and gap-downs
In India, when the trading or the stock market opens after the pre-opening session at 9:15 am everyday from Monday to Friday except a public holiday, the first some minutes in trade are highly volatile. This is also owed to buyers and sellers bid to match prices depending on their perception of the stock market direction and once this is done the market generally stabilizes.
Here so, a risk averse trader should only begin his trade after a watchful eye on the stock market direction and instead of putting bet or trading on his sole perception. As without it, the loss can be bountiful in case there is a huge gap up and one has placed a sell order in some stock which has shown a huge gap up in today's trading session in comparison to yesterday's or last trading day's close.
Other ace investors or traders who have a deep understanding of the market can make quick and heavy gains or losses depending on their perception of the markets by placing pre-market orders.