A gap is an area of a gap on a security’s chart where its price either rises or falls compared to the previous day’s close, and no trading occurs between the two. Gaps are common when news triggers a change in market fundamentals during hours when markets tend to be closed, such as a profit and loss announcement outside of business hours.
The gap occurs when the price of a stock or asset opens significantly above or below the previous day’s close, with no trading activity between them. A partial difference/gap occurs when the opening price is higher or lower than the previous day’s close, but is within the previous day’s price range. A full gap occurs when the opening price breaks out of the previous day’s range. The gaps, especially the complete gaps, show that there was a huge change in mood during the night.
In volatile markets, traders can benefit from large increases in asset prices if they can be turned into opportunities. Gaps are areas in a chart where the price of a stock moves sharply up or down, with little or no trade between them. As a result, the asset chart shows a gap in the normal price trend. An enterprising trader can interpret and use these gaps to make a profit.
There are often empty spaces on price charts, known as gaps, which represent times when no stock has traded in a particular price range. This usually happens between the close of the market on one day and the open of the next day. There are two primary types of gaps – Gap Up and Gap Down.
For the Gap Up to form, the minimum price after the market closes must be higher than the previous day’s maximum price. Gap Up are generally considered bullish.
The Gap down is the exact opposite of a Gap Up, the high after the close of the market must be below the low of the previous day. Gap Down are generally considered bearish.
Up and down gaps can form on daily, weekly or monthly charts and are considered significant if accompanied by above average volume.
Gaps appear more often on daily charts, where every day provides an opportunity to create a gap at the open. Gaps on weekly or monthly charts are quite rare: a gap should occur between the close of Friday and the open of Monday for weekly charts, and between the last day of the month’s close and the first day of the next month’s opening for monthly charts.
The Gaps can be divided into four main categories:
- Common Gap,
- Breakaway Gap,
- Runaway Gap,
- Exhaustion Gap.
Common Gap Pattern also termed as ‘Regular Gap’. Regular gaps cannot be placed in a price pattern – they simply represent an area where price has moved apart. These gaps are usually filled relatively quickly (usually within a few days) compared to other types of spaces.
Breakaway Gap Pattern also termed as ‘Breakout / Breakdown Gap’. The Breakaway Gap occur at the end of a price pattern and signal the start of a new trend. A breakaway gap occurs when price breaks above an area of support or resistance, such as those set during a trading range. When price breaks out of an established trading range through a gap, it is a breakaway. Breakaway can also occur due to another type of chart pattern, such as a triangle, wedge, cup and handle, a rounded bottom or top, or a head and shoulders pattern.
Runaway Gap Pattern also termed as ‘Continuation Gap’. Runaway gaps occur in the middle of a price pattern and signal a hurry of buyers or sellers who share a common belief in the future direction of the underlying stock. The continuation gap commonly seen on charts that occurs when trading activity misses consecutive price points, usually triggered by intense investor interest. In other words, there was no trade, defined as the exchange of property for a security, between the price point where the runaway gap began and where it ended.
Exhaustion Gap Pattern can also be termed as ‘Suction Gap’. Exhaustion gaps occur near the end of a price pattern and signal a final attempt to hit new highs or lows.