The Different Gaps in Technical Analysis
A gap in technical analysis refers to an unfilled interval on a price chart where no trading occurs. On
a Japanese candlestick chart, this is interpreted as a window. In an uptrend, a gap forms when the
highest price of one day is lower than the lowest price of the following day, while in a downtrend, it
occurs when the lowest price of one day is higher than the highest price of the next day. For
instance, if a stock reaches a high of $30.00 on Wednesday, opens at $36.00 on Thursday, briefly
drops to $35.00, and then jumps to $37.00, the area between $30.00 and $35.00 shows as a gap on
the chart. Recognising gaps before market movements begins can be crucial.
Different kinds of gaps:
- Breakaway gap: This occurs when prices break out from a congestion area, such as a
triangle, with a gap, indicating strong sentiment change and potential for a powerful move.
Heavy volume after the gap suggests the gap may not be filled. However, if the breakout
occurs on low volume, there’s a chance the gap will fill before the trend resumes. - Common gap: Also known as an area or pattern gap, common gaps appear during sideways
trading between support and resistance levels or in congestion areas. These gaps often get
filled as prices move back to close the gap in subsequent trading. - Exhaustion gap: This gap signals the end of a rapid move in either direction, characterized by
heavy volume. A reversal is likely when an exhaustion gap forms at the top of a move. - Measuring gap: Also called a runaway gap, this gap typically occurs midway through a rapid
advance or decline, not associated with congestion areas. It serves to measure the potential
extent of the ongoing move.