Price Gaps Trading Method

Price Gaps

There are several types of price gaps. Their descriptions can be found in many books published on Technical Analysis. A price gap leaves a void on the chart where no trading took place. For a gap up to be present, the low of the current bar must be higher than the high of the previous bar. On a gap down, the high of the current bar must be lower than the low of the previous bar. All of the major price gaps—breakaway, continuation, exhaustion and island reversals— leave a price gap on the chart.

There is one type of gap that is not as often discussed in the mainstream publications, but is well known to experienced traders—the opening gap. An opening gap does not require an actual void on the chart. This type of gap is defined by the closing and opening prices of two candles. An opening gap up only requires that today’s open be higher than yesterday’s close. The shadows of the two bars can overlap. This leaves a gap between the two bothes. Vice versa for an opening gap down.

The majority of opening gaps fill within the gap day. If price has already ad­vanced for several days and then gaps open, the chances of it filling should increase. In most cases, exiting an opening gap will help maximize profits on a short-term trade. It is important to understand the difference between price gaps and opening gaps. Most gaps described in candlestick patterns refer to an opening gap, but may not require the gap leave a void on the chart. Traders should carefully read the description of the patterns.