How to do Gap Correction in Divergence Analysis Calculations
Dear Pascal,
This is the 3rd time I am reading the divergence chapter of the Value in Time. I have developed some tools for calculation of the effective volume and active boundaries and now I am trying to implement a tool for divergence analysis. Unfortunately, it is unclear for me [U]how to do gap correction in price rate of change[/U] calculations.
For example, consider a stock with a gap from for example $10 to $13 in its price trend. The price changes before $10 and price changes after $13 has smooth variations without gap.
My first question is, how should I remove this gap? Do you mean increasing all prices before the gap by $3 as there is a $3 gap? I would be grateful if you could explain this further.
My second question is, every day on the market (the market I am working on and not the international market), we have opening gaps sometimes up to +-5% and this amount of gap is typical of the market I am working on it. For what percents of gap I should apply gap correction? Could you recommend a criteria?
Regard,
ALI