Gap Variations for Trading Beginners.
Before proceeding, I would like to recommend you read Candlesticks Basics, in case you are not familiar with the concept or the terminology. This blog post will be a simple explanation of the variations of Gaps and will not teach how to trade such.
A Gap also known as a Window, when it comes to chart patterns or finances, is a shift or break in price direction between the close and the open of two following days. A Gap is a price range in which no shares or stocks are transacted creating a period of empty space.
For example, if a stock closes at 100 and the following day opens at 110 there is a gap in between prices. That´s a gap! It could go up or down, really far up or really far down. Opening Gaps can be the result of new releases or big events during the period the market is closed or caused by traders placing their orders before the market opens.
A gap is a simple concept as the name suggests it is a vacant space.
“Gaps represent big supply/demand imbalances and are a favorite set-up for more experienced traders in particular.” — Sam Seiden Chief Education, Products & Services Officer at Online Trading Academy.
There are several descriptions of Gaps and Windows, variations, and mannerisms of how people like to refer to them and here is my try:
Full Gap Up happens when the opening price is higher than yesterday´s high price. The gap is not only between prices but also between candlesticks.
Full Gap Down happens when the opening price is less than yesterday´s low. The gap isn’t only between prices but also between candlesticks.
Partial Gap Up happens when the opening price is higher than yesterday´s close, but not higher than yesterday´s high. So a part of the body on day two is still within day one´s range. In other words, there is a price gap between day one and day two, but the day two candlestick is still within the body range of day one, instead of a visible gap as in a Full Gap Up or Down.
Partial Gap Down happens when the opening price is below yesterday´s close, but not below yesterday´s low. So part of the body of day two is still within day´s one range. In other words, the gap is between prices, where day two opened at a lower price than the closing of day one, but the day two candlestick is still somewhat within the body of day one, instead of a visible gap as in a Full Gap Up or Down.
Breakaway Gaps happens at the end of a price trend and indicates the beginning of a new trend, usually supported by high volumes, breaking away from the trend´s range to start a new high. It should not fill the gap in the following days, but a partial fill can happen.
Continuation Gaps (Also known as Measuring Gap or Runaway Gap) happens in the middle of an existing price trend. There is a full gap, and then the continuation of the trend which may be needless to say but it is an indication that it wasn’t the end of the trend and that it will continue. This will attract many buyers and or sellers, according to their beliefs of the stock’s direction in the future.
Exhaustion Gaps can be easily compared to the continuation Gap. The gap happens during a trend but in this case, a trend that is near the end and indicates a final effort to hit new highs and lows. Usually followed by a fill of the gap within a few bars or days which unfortunately doesn’t show in the image, but just imagine it moving downward until it fills the vacant area of the gap. (See Filled Gap below)
Common Gaps simply indicate an area where the price has “gapped” which are not placed in a price trend and do not break out from trading range and are rapidly filled. (See Filled Gaps below)
Filled Gaps happens when after a gap, prices level-out and move back in the following days to fill or cover the area left empty or vacant by the gap.
Resistance & Support: Gaps or Windows can act as support & resistance.
In the image we can see a Common gap down which is confirmed because it is quickly filled. A Breakaway Gap breaks off and is confirmed because it is out of the trending range creating a new trend and gap isn’t filled. A Continuation Gapis confirmed by the trend that well continues, and an Exhaustion Gap that tries for the last time to make new highs but the market goes down and fills that gap and continues going down confirming the exhaustion.
Let us know in the comments what you´re thoughts are we are willing to even make any adjustments or even add any helpful tips!