Gap (chart pattern)

Sequence of Gaps

A gap is defined as an unfilled space or interval. On a technical analysis chart, a gap represents an area where no trading takes place. On the Japanese candlestick chart, a window is interpreted as a gap.

In an upward trend, a gap is produced when the highest price of one day is lower than the lowest price of the following day. Thus, in a downward trend, a gap occurs when the lowest price of any one day is higher than the highest price of the next day.

For example, the price of a share reaches a high of $30.00 on Wednesday, and opens at $31.20 on Thursday, falls down to $31.00 in the early hour, moves straight up again to $31.45, and no trading occurs in between $30.00 and $31.00 area. This no-trading zone appears on the chart as a gap.

Gaps can play an important role when spotted before the beginning of a move.

Types of gaps

There are four types of gaps, excluding the gap that occurs as a result of a stock going ex-dividend. Each type has its own distinctive implication so it is important to be able to distinguish between them.


It is quite possible that confusion between measuring gap and exhaustion gap can cause an investor to position himself incorrectly and to miss significant gains during the last half of a major uptrend. Keeping an eye on the volume can help to find the clue between measuring gap and exhaustion gap. Normally, noticeable heavy volume accompanies the arrival of exhaustion gap.

Trading gaps for profit

Some market speculators "Fade" the gap on the opening of a market. This means for example that if the S&P 500 closed the day before at 1150 (16:15 EST) and opens today at 1160 (09:30 EST), they will short the market expecting this "upgap" to close. A "downgap" would mean today opens at, for example, 1140, and the speculator buys the market at the open expecting the "downgap to close". The probability of this happening on any given day is around 70%, depending on the market. Once the probability of "gap fill" on any given day or technical position is established, then the best setups for this trade can be identified. Some days have such a low probability of the gap filling that speculators will trade in the direction of the gap.


Measuring gap 
Exhaustion gap[2] 
Common gaps[3] 
Breakaway gap[4] 


External links

This article is issued from Wikipedia - version of the 4/1/2016. The text is available under the Creative Commons Attribution/Share Alike but additional terms may apply for the media files.