Gaps are very common especially in share markets and they are capable of providing information as well as insights about underlying the dynamics of the market. Gaps are generally created when the price of closing of previous day and open of following days have different levels of pricing. During the time of large volatility, the gaps of intraday could even exist.
1) Breakaway Gap
The gap of breakaway describes the gap in pricing which gaps over the support or the level of resistance. The chart shows pricing chart of the APPL with a very strong level of resistance. Once this gap has been formed, this trend would be accelerated.
The gap of breakaway, therefore, shows the continuous trend signal mostly. The study of the chart shows several gaps of breakaway through significant levels of resistance. Each of the gap of breakaway leads to the trend of continuation also.
2) Exhaustion Gap
The gap of exhaustion generally happens during the trending periods and might even signal reversal of the same. Pricing makes the final gaps in direction of this trend and reverses.
The situation of the chart shows 2 gaps of exhaustion in previous support as well as levels of resistance. In both the cases, candles after gaps represent small candles and therefore indicate indecision. The candles are considered to be large candles of momentum and provides final signal.
It’s suggested to wait for the candle to be completed which confirms the changes in the direction of avoiding running into the false signals.
3) Continuation Gap
The gaps of continuation happen in middle of the trends. In the uptrend, the upwards gap indicates continuation and also shows that the additional buyers have entered the stock market for pushing the prices higher.
Preferably, the gaps of continuation are not so big in size for confirming sustainability. Any kind of extreme pricing or the movements in gap may foreshadow the shift in the dynamics of buyers and sellers.
4) Common Gap
As the term suggests, common gaps are not extraordinary and they might happen frequently without major implications about the further movements of price.
These common gaps often happen when the price ranges. These gaps aren’t too big and they are filled very quickly.
Therefore, it’s suggested to avoid trade gaps within the range and also without additional kind of confluence factors. The other type of gaps generally offer high probability opportunities of trading.
Gap fill is considered to be a very popular strategy of trade and is used not just in share market, but even in Forex trading. Once the gaps are formed, they keeps happening that pricing eventually returns back to origin of gaps and therefore closes the gaps.
It’s recommended that the trading gaps close by themselves. But using the gap fills for picking the targets could prove to be quite beneficial. Also, once these gaps are closed, you may even find opportunities of re-entry as the price would return in the original direction.
Blog by Nifty Trading Academy