Gap (chart pattern): Difference between revisions

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[[Image:Allgaps new.jpg|right|thumb|400px|Sequence of Gaps]]

{{Short description|Price chart analysis concept}}

[[ImageFile:Allgaps new.jpg|right|thumb|400px290px|Sequence of Gaps]]

A '''gap''' is defined as an unfilled space or interval. On a [[technical analysis]] chart, a gap represents an area where no trading takes place. On the Japanese candlestick chart, a window is interpreted as a gap. Gaps are spaces on a chart that emerge when the price of the financial instrument significantly changes with little or no trading in between.

In an upward [[Market trend|trend]], a gap is produced when the highest [[price]] of one day is lower than the lowest price of the following day. ThusConversely, in a downward trend, a gap occurs when the lowest price of any one day is higher than the highest price of the next day.

A '''gap''' is defined as an unfilled space or interval. On a [[technical analysis]] chart, a gap represents an area where no trading takes place. On the Japanese candlestick chart, a window is interpreted as a gap.

For example, the price of a share reaches a high of $30.00 on Wednesday, and opens at $3631.0020 on Thursday, falls down to $3531.00 in the early hour, moves straight up again to $3731.0045, and no trading occurs in between $30.00 and $3531.00 area. This no-trading zone appears on the chart as a ''gap''.

In an upward [[Market trend|trend]], a gap is produced when the highest [[price]] of one day is lower than the lowest price of the following day. Thus, in a downward trend, a gap occurs when the lowest price of any one day is higher than the highest price of the next day.

Gaps can play an important role when spotted before the beginning of a move.

For example, the price of a share reaches a high of $30.00 on Wednesday, and opens at $36.00 on Thursday, falls down to $35.00 in the early hour, moves straight up again to $37.00, and no trading occurs in between $30.00 and $35.00 area. This no-trading zone appears on the chart as a ''gap''.

==Types of Gapsgaps==

Gaps can play an important role when spotted before the beginning of a move.

There are four different types of gaps, excluding the gap that occurs as a result of a stock going [[Ex-dividend date|ex-dividend]]. Since eachEach type of gap has its own distinctive implication, so it is very important to be able to distinguish between such gapsthem.

==Types of Gaps==

* '''BreakwayBreakaway gap''' : It– occurs when prices break away from an area of congestion. When the price is breaking away from a triangle (Ascending or Descending) with a gap then it can be implied that change in [[Market sentiment|sentiment]] is strong and coming move will be powerful. One must keep an eye on the volume. If it is heavy after the gap is formed then there is a good chance that market does not return to ''fill the gap''. When the price is breaking away on a low volume, there is a possibility that the gap will be filled before prices resume their trend.

There are four different types of gaps, excluding the gap that occurs as a result of a stock going [[ex-dividend]]. Since each type of gap has its own distinctive implication, it is very important to be able distinguish between such gaps.

* '''Common gap''' : It is– also known as an ''area gap'', ''pattern gap'', or ''temporary gap''. They, tend to occur when trading is bound between [[support and resistance]] level on a short span of time and market price is moving sideways ("where the price trend...has been experiencing neither an uptrend nor a downtrend. Instead, the price activity has been oscillating between a relatively narrow range without forming any distinct trends"). One can also see them in price congestion area. Usually, the price moves back or goes up in order to ''fill the gaps'' in the coming days. If the gap is filled, then they offer, not much in the way oflittle forecasting significance.

* '''Exhaustion gap''' – signals the end of a move. These gaps are associated with a rapid, straight-line advance or decline. A reversal day can easily help to differentiate between the Measuring gap and the Exhaustion gap. When theyit areis formed at the top with heavy volume, there areis significant chanceschance that the market is exhausted and reversalprevailing trend is ahead.at Ahalt reversalwhich dayis canordinarily easilyfollowed differentiateby betweensome theother Measuringarea gappattern anddevelopment. theAn Exhaustion gap should not be read as a major reversal.

* '''Breakway gap''' : It occurs when prices break away from an area of congestion. When the price is breaking away from a triangle (Ascending or Descending) with a gap then it can be implied that change in [[sentiment]] is strong and coming move will be powerful. One must keep an eye on the volume. If it is heavy after the gap is formed then there is a good chance that market does not return to ''fill the gap''. When the price is breaking away on a low volume, there is a possibility that the gap will be filled before prices resume their trend.

* '''Measuring Gap''' :– Alsoalso known as Runaway Gap, a Measuring''runaway gap is'', formed usually in the half way of a [[price]] move. It is not associated with the congestion area, it is more likely to occur approximately in the middle of rapid advance or decline. It can be used to measure roughly how much further ahead a move will go. Runaway gaps are not normally filled for a considerable period of time.

* '''Common gap''' : It is also known as ''area gap'', ''pattern gap'' or ''temporary gap''. They tend to occur when trading is bound between [[support and resistance]] level on a short span of time and market price is moving sideways. One can also see them in price congestion area. Usually, the price moves back or goes up in order to ''fill the gaps'' in the coming days. If the gap is filled, then they offer, not much in the way of forecasting significance.

* '''Exhaustion gap''' signals end of a move. These gaps are associated with a rapid, straight-line advance or decline. When they are formed at the top with heavy volume, there are significant chances that the market is exhausted and reversal is ahead. A reversal day can easily differentiate between the Measuring gap and the Exhaustion gap.

* '''Measuring Gap''' : Also known as Runaway Gap, a Measuring gap is formed usually in the half way of a [[price]] move. It is not associated with the congestion area, it is more likely to occur approximately in the middle of rapid advance or decline. It can be used to measure how much further ahead a move will go.

==Caution==

It is quite possible that confusion between ''measuring gap'' and ''exhaustion gap'' can cause an investor to position himself incorrectly and to miss significant gains during the last half of a major uptrend. Keeping an eye on the volume can help to find the clue between ''measuring gap'' and ''exhaustion gap''. Normally, noticeable heavy volume accompanies the arrival of ''exhaustion gap''.

==Trading Gapsgaps for profit==

Some market speculators "Fade" the gap on the opening of a market. This means for example that if the [[S&P 500]] closed the day before at 1150 (16:15 EST) and opens today at 1160 (09:30 EST), they will short the market expecting this "upgap" to close. A "downgap" would mean today opens at, for example, 1140, and the [[speculator]] buys the market at the open expecting the "downgap to close". The probability of this happening on any given day is around 70%, depending on whichthe market you look at. Once the probability of "gap fill" on any given day or technical position is established, then the best setups for this trade can be identified. Some days have such a low probability of the gap filling that speculators will trade in the direction of the gap.

==Examples==

{{gallery

|lines=1

|width=250

|File:measuringgap new.jpg|<{{center>|Measuring gap}}

|File:exhaustiongap new.jpg|<{{center>|Exhaustion gap<ref>[http://www.investopedia.com/terms/e/exhaustiongap.asp Exhaustion gap - investopedia.com]</ref>}}

|File:commongap new.jpg|<{{center>|Common gaps<ref>[http://www.investopedia.com/terms/c/commongap.asp Common gap - investopedia.com]</ref>}}

|File:breakawaygap new.jpg|<{{center>|Breakaway gap<ref>[http://www.investopedia.com/terms/b/breakawaygap.asp Breakaway gap - investopedia.com]</ref>}}

}}

== References ==

{{reflist}}

==External links==

* [http://www.investopedia.com/university/charts/charts8.asp ''Analyzing Chart Patterns: Gaps''] at investopedia.com

* [http://www.investopedia.com/articles/trading/05/playinggaps.asp ''Playing The Gap''] at investopedia.com

{{technical analysis}}

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[[Category:TechnicalChart analysispatterns]]

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