Gaps

Gaps are price differences between present periods opening and previous periods closing. Certain gap is said to be formed based on its volatility and strength in the volume. As per the gap theory, gaps formed in any kind of markets, irrespective of time period has to be filled.

Gap Types:

1. Common
2. Runaway
3. Exhaustion
4. Breakaway

Common gaps (Trading gaps)

This generally occurs in day to day trading periods or early morning gaps when differed with previous day’s closing. These gaps may fill quickly as they do not have much significance in nature. This may be due to over excitement of traders, sudden increase of volumes or any other insignificant reason.

Runaway gaps (Towards the trend)

When markets are taking a good trend, one can find a sudden gap in the price candles due to sudden entry volumes which has taken effect because of good trend. Also, traders who wait for a good correction may not find that on the charts and as a result, sudden buying may enter into the stock. As this is a gap towards the trend, the trend may continue to travel failing to fill the gap soon. Generally, this type of gap is not that easy to get filled. It may take months or even years to get filled.

Exhaustion gaps (Trend reversal gaps)

This occurs almost at the end of a bear or bull phase. The gap that forms in this area will be filled very soon as the trend changes immediately after the phenomenon formation. If a gap is filled at the top after a long bull market by taking a trend reversal, once may expect bear market ahead as investors tend to sell their stock. If this happens at the bottom after a bear market, a bull market is said to be started.

Breakaway gaps (Consolidated market gaps)

When a gap forms after a consolidated markets or congestion area, it is said to be a breakaway gap. After many weeks or months of trade, the stock starts breaking in the either way giving rise to a trend. Investors who waits for a much longer time, puts sudden volume into the stock resulting in the gap formation. As the trend starts newly, the gap may or may not get filled immediately. It might also take months to get filled depending on the strength of the trend.