Gaps In Chart Analysis

 


 

Perhaps you have noticed some gaps during chart analysis in forex. But have you ever wondered the reason behind these gaps in price charts and what do they mean? Well,

the prime focus of this page is to precisely help you understand that. Read on to know all on gaps in chart analysis and the different types of gaps in charts.

 

When analyzing gaps in charts, you must understand that it is an area on a price chart in where there were no trades taking place. Generally this happens during the time when the market closes on one day and opens the next day. There could be a number of reasons for this. One of them could be the earnings report coming out after the stock market has shut down for the day. Or if the earnings were considerably more than expected, many traders may be placing buy orders for the next day, which could result in a higher price opening than the previous day's closing. A gap will form in the price chart if the trading that day continues to trade above that point.

 

Gaps in chart analysis are confirmation that something significant has happened to the fundamentals following this market movement. You will come across gaps more frequently on the daily charts. They are rare on the weekly or monthly charts.

Here are different types of gaps in charts:

Common Gaps

Also called a trading gap or an area gap, the common gap in chart analysis is usually monotonous. As the name suggests these gaps are common and usually get filled up quickly, which happens when the price action usually retraces at the least to the last day before the gap. This is also known as closing the gap and can be caused by a stock going ex-dividend when the trading volume is low. One should be aware of these types of gaps in charts   but it is rare that they will produce good trading opportunities.

Breakaway Gaps
When analyzing gaps in charts, the breakaway gaps are the exciting ones. They get formed when the price action is moving out of their trading range. This indicates that there are many more buyers than sellers or more sellers than buyers, meaning lots of market enthusiasm. A good confirmation for chart analysis with gaps is if they are associated with classic chart patterns. For instance, an ascending triangle with a breakout gap to the upside can be a much better trade than a breakaway gap without a good chart pattern.

Runaway Gaps
These types of gaps in charts are also called measuring gaps, and known to occur due to an increased interest the stock. The runaway gaps may be formed in uptrend or downtrends. Runaway gaps during uptrend may be the result of important news events that caused new interest in the stock. So an increased interest in buying may happen all of a sudden. Runaway gaps in downtrends usually represent increased liquidation of that stock by traders and buyers who are standing on the sidelines. This is not a very good situation if the price continues to drop and gap down to find buyers.

Exhaustion Gaps
Exhaustion gaps are seen near the end of a good up- or downtrend. These types of gaps in charts are recognized by high volume and huge price difference between the previous day's close and the new opening price. If one does not notice the unusually high volume, it is easy to mistake these gaps as runaway gaps. It is not uncommon to sell all positions to liquidate holdings in the market. Exhaustion gaps get quickly filled with a reverse in the prices trend.

In a nutshell, gaps in chart analysis are significant technical development in price action and should not be ignored. Candlestick chart analysis is loaded with patterns that depend on gaps to fulfill their goals. Chart analysis with gaps and understanding them completely should be the objective of every serious trader.

 

 
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