Gaps and Gap Analysis - Blog Banner

Gaps and Gap Analysis

Isfaqur RahmanPosted by

Gaps and Gap Analysis

  • Price charts often have blank spaces known as gaps.
  • They represent times when no shares were traded within a particular price range.
  • Up Gap: Today’s Low/Open/Close > Previous Day’s High/Open/Close
  • Down Gap: Today’s High/Open/Close < Previous Day’s Low/Open/Close
  • Gaps result from extraordinary buying or selling interest developing due to a change in the fundamentals or the psychology of the crowd.

Gaps and Gap Analysis

Timeframe of Gaps

Timeframe of Gaps

  • Gaps appear more frequently on daily charts than on weekly or monthly charts.
  • Up and down gaps are considered significant when accompanied by higher than average volume.
  • Should avoid:
    • Intraday gaps
    • Very thinly-traded securities

Types of Gaps

  1. Common,
  2. Breakaway,
  3. Runaway, and
  4. Exhaustion

Common Gaps

  • Sometimes referred to as a trading gap or an area gap.
  • The common gap is usually uneventful (e.g. ex-dividend) and got filled fairly quickly.
  • It usually appears in a trading range or congestion area.
  • It is doubtful to produce trading opportunities.

 

Common Gaps

Breakaway Gaps

  • They occur when the price action is breaking out with a high volume of a trading range or congestion area.
  • It might take a long time to get filled.
  • A good confirmation for the trading gap is to associated with classic chart patterns.

Breakaway Gaps

Runaway Gaps

  • These are usually happened during (halfway through) the trend.
  • Upside Runaway Gaps:
    • Increased buying interest, caused by significant news events, happens all of a sudden.
    • It represents an almost panic state in traders
  • Downside Runaway Gaps:
    • This usually represents increased liquidation of stock by traders.
    • The price has to continue to drop and gap down to find buyers.

Runaway Gaps

Exhaustion Gaps

  • These happen near the end of a good up- or downtrend.
  • They are identified by-
    • High volume
    • A large price difference between the previous day’s close and the new opening price.
  • Exhaustion gaps are quickly filled as prices reverse their trend.

Exhaustion Gaps

Spread the love
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  

Leave a Reply