A gap is a break in the price chart of a stock or an index, where there is no trading activity between two consecutive days. In technical analysis, gaps are considered to be significant patterns that can provide information about the market trend and potential future price movement. There are several types of gaps, including Common Gaps, Breakaway Gaps, Runaway Gaps, and Exhaustion Gaps.
Common Gaps occur frequently and are typically insignificant in terms of market analysis. They often occur within a trading range and don't provide much information about the market trend.
Breakaway Gaps occur at the start of a new trend and signal a potential change in the market direction. They usually occur after a stock or an index has been trading in a range and the price suddenly moves away from that range. This gap can indicate the start of an uptrend or a downtrend, depending on the direction of the gap.
Runaway Gaps occur during an established trend and signal a continuation of that trend. They usually occur when a stock or an index makes a strong move in one direction and there is a gap between the high or low of one day and the opening price of the next day.
Exhaustion Gaps occur at the end of a trend and signal that the trend may be about to reverse. They usually occur when a stock or an index makes a strong move in one direction, followed by a gap in the opposite direction, signaling that the trend may have reached its limit.
It's important to note that gaps are not always reliable indicators, and traders should use other analysis methods, such as trend lines and support and resistance levels, to confirm potential market trends. Gaps can also be filled, meaning the price can move back to fill the gap, so traders should also consider the potential for gap fill in their analysis.
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