Let’s Find out the GAPS

Gaps occur when either the low for the current bar or candle is above the high for the previous bar/Candle or the high for the current bar/candle is lower than the low of the previous bar/candle. Figure 3.29 pictures a gap down.

The “hole” or “void” created in the price history is a “price range at which no shares changed hands” (Edwards and Magee, 2003). A price gap may or may not have significance. We have seen them before in analyzing breakouts from classic patterns, trend lines, and support or resistance zones, and in those instances,the gaps were demonstrating the beginning of a new trend.

However, gap types differ based on the context in which they occur. Some are meaningful, and others can be disregarded.

                       Breakaway (or Breakout) Gaps

The most profitable gaps are those that occur at the beginning of a trend, called breakaway gaps. We have seen these before when prices suddenly break through a formation boundary and a major change in trend direction begins.

Breakaway gaps signal that a pattern has been completed and a boundary penetrated. The size of the gap—the space between the two extremes in which no activity occurs—appears to be proportional to the strength of the subsequent price move.

Upward gaps usually are accompanied by heavy volume; downward gaps are not necessarily accompanied by heavy volume. The best manner of trading breakaway gaps is to wait a short while for the initial fading or profit-taking by the professionals to see if the gap is filled and if not, to enter in the direction of the gap with a stop at the point where the gap would be filled.

If the gap is filled immediately, a stop and reverse may be appropriate, because a sudden failure in a gap is often followed by a large move in the opposite direction from the gap direction, similar to a Specialist’s Breakout.

                   Runaway Gaps (or Measuring Gaps)

Gaps that occur along a trend are called runaway gaps. They can appear in strong trends that have very few minor corrections and just keep rising or declining without retrenchments or other interruptions.

They are also called measuring gaps because, like pennants and flags, they often occur at about the middle of a price run, and thus the initial distance to them can be projected above them for a target price. This seems to work about 60% of the time (Bulkowski, 2000).

                                            Exhaustion Gaps

Exhaustion gaps occur at the end of moves but are not recognized at the time because they have the same characteristics as runaway gaps. If a gap is later closed, it is likely an exhaustion gap.

These gaps appear when a strong trend has reached a point where greed or fear has reached its apex. Usually they represent latecomers to the trend who are anxious to jump on or jump off. They can occur on light volume but more often occur on heavy volume.

The sign that such gaps are not runaway gaps is an immediate fill within a few bars of the gap. Remember that a runaway gap often occurs mid-stream in a price run. Prices should not immediately reverse and fill a gap unless the end of the run is approaching. Exhaustion gaps are seen at the end of a move and signal a potential trend reversal.

Usually more evidence of an exhaustion gap is necessary before an action signal can be justified. Sometimes prices reverse immediately, and sometimes they enter a congestion area.

Know how to identify the four major types of gaps, which ones fill and which ones don’t. Don’t “fudge” the setup.  If things don’t line up or are ambiguous, this is probably the case to everyone else. Applicable to all time frames; concept is still very much the same.Learning and successful application are two very different things.

Filling the gap between them takes time based on your own effort, diligence, sensibilities, etc. Happy Trading. Don’t forget to study other post. just click here.