Gap Strategies [ video ]
Sources: Investopedia.com and others
A gap is an area on a technical chart where an asset’s price jumps higher or lower from the previous day’s close. more
Gaps occur when there is empty space between two trading periods that’s caused by a significant increase or decrease in price. For example, a stock might close at $5.00 and open at $7.00 after positive earnings or other news.
There are basically 3 types of gaps for traders… 1, maybe 2 variations on each:
Breakaway gaps –[ “Gap-n-go” ] Breakaway gaps form at the start of a trend.
*Example…. say market has traded off to be a bit oversold and before the market opens the Fed announces surprise rate cut. That should produce an upside gap… “gap-n-go” would be most likely then.
Runaway gaps — [ “Gap Fill and Resume”] Runaway gaps form during the middle of a trend. Price reverses like “gap and crap”, but once the gap is filled reverses again for perhaps sustained move in the direction of the initial gap.
An exhaustion gap is a gap that occurs after a rapid rise in a stock’s price begins to tail off.more
A runaway gap is a type of gap on a price chart that occurs during strong bull or bear movements. more
An Upside Tasuki gap is a candlestick formation that is commonly used to signal the continuation of the current trend. more
A piercing pattern is a technical trading signal that is formed by a closing down day with a good-sized trading range, followed by a trading gap lower the following day with a white candlestick that covers at least half of the upward length of the previous day’s red candlestick body, finishing with a close higher for the day. more