Different Gap Patterns : NobleTrading Blog

Thursday, December 10, 2009

Different Gap Patterns

Gaps are common chart patterns that can be good indicators of future trends and trend changes. They are also the necessary component of many chart patterns. By definition gaps are areas on the chart where there is no price activity; the price movement breaks before the gap and continues after the gap. Gaps are mainly of 4 types, namely, common gaps, breakaway gaps, runaway gaps and exhaustion gaps.

Common Gaps: They are formed because of usual market activity. The main triggering factors are news and low trading volume. Common gaps are usually filled quickly. Also known as trading gaps and area gaps.
Breakaway Gaps: They are formed at the start of a bullish or bearish trend. Breakaway gaps are formed usually after a consolidation and are associated with high increase in trading volume. The gap can then act as support/resistance for future movements. Breakaway gaps are not usually filled in the near future.
Runaway Gaps: They are formed within a trend and indicate further strengthening of the trend. Like breakaway gaps, they act as support/resistance for future movements. With runaway gaps, the volume should be on average level; extreme levels can make the gap exhaustion gaps. They are also not usually filled in quick time.
Exhaustion Gaps: They are formed when the trend is about to end and reverse. They are associated with high trading volume. The price first moves in the direction of the trend but then soon reverses to fill the gap and start a new trend. Usually exhaustion gaps are the last large move in a trend. The signal strength is optimum when the stock/security makes a substantial move.