In this article, we will discuss a very common pattern that is called gap.
In technical analysis, the gap is the difference between the closing price of the previous candlestick and the opening price of the next candlestick.
📈Gap up represents a situation when the price bounces up sharply at the moment of a transition from one candlestick to another. The price gap that appears between them is called gap up.
📉Gap down represents a situation when the price drops sharply at the moment of a transition from one candlestick to another, the price gap between the closing price of the previous candle and the opening price of the next candle is called a gap down.
From my experience, I realized that with a high probability the gap tends to be filled. For that reason, once you see a gap, consider trading opportunities around that.
Depending on the market conditions where the gap appears, there are several types of a gap to know:
1️⃣Common gap appears in a weak, calm market. When the trading volumes are low and the market participants are waiting for some trigger, or the asset reached a fair value price.
Above, there is a perfect example of a common gap that was formed on Dollar Index on an hourly time frame.
2️⃣Breakaway gap appears in a situation when the price suddenly breaks a structure (support or resistance) in a form of a gap.
Such a gap usually confirms a structure breakout.
I spotted a perfect breakaway gap on Dollar Index. The market violated a solid horizontal support with that.
3️⃣Runaway gap usually appears when the market is growing or falling sharply. It signifies the dominance of buyers/sellers and highly probable continuation. Usually such gaps are not filled.
Runaway was a perfect indicator of a strength of buyers on US30 Index.
4️⃣Exhaustion gap is, in contrast, appears around major key levels and signifies a highly probable reversal. The exhaustion gap is usually confirmed by a consequent strong opposite movement that fills the gap.
US100 formed an exhaustion gap, trading in a strong bullish wave. After that the gap was filled and the market started to fall rapidly, forming a breakaway gap.
Learn to recognize gaps on a chart and learn to interpret them. It will increase the accuracy of your technical analysis.