Trend is your friend. Dance with the friend. Tune to the trend.
Gaps are continuation chart pattern, formed by an unfilled space between trading time period. It may be part of the pattern formation as seen in abandoned baby or island formation.
Gaps are referred as Tasuki, meaning window in Japanese Candlestick charts.
In an uptrend price opens and closes with low above the high of the previous day. Similarly in a down trend price opens and closes with high below the low of the previous day. There is a clear price gap between the two trading sessions. Study the chart given below.
Types of Gaps
A gap above the previous day is referred as an upward gap or a rising window and one below the previous day is called a downward gap or a falling window.
Whether a rising window (up trend) or a falling window (down trend), they are classified as:
- Break away or Runaway GapIn a trend reversal pattern formation, the price breaks out or breaks down with a gap, marking a high momentum. There will be increased volume followed by the gap.
- Midway Gap or Measuring GapThese occur approximately at the mid point of a trend and thus we can measure further movement of the trend.
- Exhaustion GapWhen steam of the trend gets exhausted, the prices makes one last thrust with a gap. Subsequently the trend reverses to move in the opposite direction.
- Common GapsThey occur now and then, here and there, with out accompanied increase in volume.
Once a gap is formed prices tend to fill the void area, either in near future or may be after several months or even years. Unfilled gaps are highly significant as support and resistant areas.
Study the chart given below.
How to trade?
In an up trend an entry is made above the gap, with the stop loss at below the gap.
In a down trend a trade may be entered below the gap, with the stop loss above the gap.
Further windows along the trend can be used to move the stop loss to protect the profit.
Click here to go back from Gaps to Chart Patterns
.Click here to learn about Candlestick Patterns
.Click here to go back to Home