Gaps are areas within a chart where prices between two bars change without trade. These gaps arise when strong shifts occur in periods when the markets close. Gap indicators detect these gaps on the charts, extending them until they are covered. As underlying technical issues cause the observed exchange rate between two currencies to alter, gaps may appear.
Types of Gaps
Gaps can be divided into four categories, including:
- Common gaps
These price discrepancies are represented by these gaps.
- Breakaway gaps
They appear towards the conclusion of pricing patterns and denote the beginning of a fresh trend.
- Gaps in continuation
They are often referred to as “runway gaps” and appear in the center of a price pattern, indicating a rush of buyers or sellers who all have the same expectations for the price’s future movement.
- Gaps in exhaustion
They mark the last attempt to make new highs or lows and appear at the end of a price trend. (Click this link to check when the next NFP is scheduled).
Types of Gap Indicators
- Downside Tasuki Gap- Bearish
It is a three-candle pattern gap signal indicating the continuation of a downturn can be found there. A smaller red candle with an opening price that spans below the body of the previous candle is displayed after the longer, red candle. The third candle, which is green, fills up the space left by the first two candles.
Gap Indicators |Indicator Series Click To Tweet2. Upside Tasuki Gap
In terms of trend direction, it is the opposite of the downside Tasuki gap. When prices often increase or decrease, this signal is quite important. It also displays a three-candle pattern, which is a sign that an uptrend is likely to continue. Its first candle is lengthy and green, and the green candle that follows it is shorter and has an opening price that gaps above the preceding candle’s body.
3. Doji Star- Bullish
In a downtrend with two candles, there is a bullish reversal candlestick pattern. The first candle is a long red candle, and a Doji candle then emerges below the first candle’s body to create a gap.
4. Doji Star- Bearish
It is a two-candle bearish reversal candlestick pattern that was discovered during an uptrend. A Doji candle then begins to burn above the body of the first flame, creating a gap. The first candle is green.
Technical Notions Behind Gap Theory
Gaps arise on specific days when a stock at its lowest trades highly than its highest price traded in the preceding day. Therefore, gaps represent a price range in which no shares changed hands while offering clues about price movements. Traders should also be aware about the genuineness of gaps such that the most valid ones occur when the market skips a price level.
Closing a Gap and What it Means
Generally there is a perception that gaps need to be closed. Closing gaps can be understood from practicability in trades; for instance, if a stock moves upwards from 50 to 54 and closes one day at top of its range at 55, the next day, it will open at 56 and keep moving resulting to a one-gap scenario.
However, if the stock rises to 60, stagnates there and comes back to 55, it implies that the 55-56 gap is covered. If the gap is not closed, it is likely it will be covered by the next intermediate retracement but there is a challenge of knowing when it will happen. Subscribe to tradingview.com and join other traders in the discussion.