Chart Patterns: Gaps

A gap in a chart is basically an empty space between one trading period and the one prior to that trading period. They normally form on account of an important and material event that will affect security, like an earnings surprise or a merger agreement.

This will happen when there is a large enough distinctness in the opening price of a trading period where the price and the subsequent price that moves do not fall within the range of the previous trading period. For instance, if a particular price of a company’s stock trades near $40 and then the next trading period opens at $45, there should be a large gap up on the chart between the two periods, as indicated below.

Figure 1

The Gap price activity can be found on bar charts and candlestick charts however will not be found on point-and-figure or basic line charts. The reasoning behind this is for that every point on both point-and-figure charts and line charts are connected.

It is said when making reference to gaps that they will always fill, meaning the price will move back and cover at least the empty trading range. Still before you enter a trade that profits the covering, take note that this doesn’t always happen and can at times take some time to fill.The four main types of gaps are: common, breakaway, runaway (measuring), and exhaustion. Each have the same structure and differ only in their location in the trend and subsequent meaning for chartists.

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