Gap
Candlefocus EditorThe four types of gaps are Common Gaps, Breakaway Gaps, Runaway Gaps, and Exhaustion Gaps, each with specific characteristics that signify particular events and trends in the security’s price.
A Common Gap occurs when a security's price gaps up or down because of minor, short-term news or fluctuations. As its name implies, this type of gap is very common and usually resolves quickly.
Breakaway Gaps represent a major shift in supply and demand for an asset and often reveal a new trend. These gaps occur when the security’s price moves suddenly and significantly, typically due to news driving the market or a breakout from a chart formation, such as when the price spikes sharply out of a wedge or flag pattern.
Runaway Gaps, or continuation gaps, occur when the price of a security continues in the same direction as the trend, either up or down. These gaps reflect a new price level not seen before and indicate a strong trend.
Finally, Exhaustion Gaps are extremely rare gaps that reflect a sudden shift in market sentiment towards the security. Usually, exhaustion gaps occur when a strong upswing, such as a parabolic move, is becoming exhausted, and the security’s price swings abruptly, resulting in a gap.
Gaps can provide valuable information to traders, so it is important to be able to distinguish between the four types and to act accordingly. Knowing what type of gap a chart is displaying can help traders find high probability entry or exit points for their trades. Gaps can also suggest potential overbought or oversold conditions, and create opportunities for profit.