Types of price gaps refer to discontinuities on a price chart where no trading activity has occurred. These types of gaps in trading emerge when the opening price of a candlestick is significantly higher or lower than the close of the previous one.
This phenomenon typically results from sudden price changes, often triggered by economic news or abrupt shifts in supply and demand conditions.
Application of Price Gaps in Technical Analysis
Price gaps are used to detect sudden shifts in price action across financial markets. Traders utilize these gaps to anticipate market trends and potential reversal zones.
Types of Price Gaps in Trading
Each price gap type signals different aspects of market direction, reversal areas, and momentum. Price gaps are classified into four primary categories:
- Common Gap
- Breakaway Gap
- Continuation Gap (Runaway Gap)
- Exhaustion Gap
Common Gap
The common gap is one of the most frequently observed types of price gaps, often appearing in choppy or sideways markets with average trading volume.
Characteristics of Common Gaps
- Also known as "area gaps" or "trading gaps"
- Typically, unrelated to major events
- Small in size
- Filled quickly
- Provide no strong market signals
- Usually form within price ranges
Real Example of Common Gap
Below is a chart showing common gaps on the NZD/CHF pair in a one-minute timeframe.
Breakaway Gap
A breakaway gap occurs when the price breaks out from a key support or resistance level. It reflects strong momentum, with price typically continuing in the direction of the gap.
Characteristics of Breakaway Gaps
- Occur at the beginning of a new trend
- Appear after price exits a consolidation zone
- High trading volume
- Indicate trend direction changes
- Rapid price movement
Real Example of Breakaway Gap
The chart below shows a breakawaygap after price exits a range in the GBP/JPY pair (1-minute chart).
Continuation Gap (Runaway Gap)
The continuation gap, also known as a runaway gap, forms when traders who missed the initial move enter aggressively, causing a surge in buying or selling pressure.
These gaps often remain unfilled for extended periods, suggesting a strong continuation of the trend, whether bullishorbearish.
Characteristics of Continuation Gaps
- Form within strong trends
- Driven by high volume
- Indicate trend strength
- Rarely retrace to gap origin
- May be news-driven
Real Example of Continuation Gap
A continuation gap on the NZD/USD pair in a one-minute chart is shown below.
Exhaustion Gap
Exhaustion gaps typically appear near the end of a trend or around significant support and resistance levels. They may resemble continuationgaps but are usually filled quickly by subsequent candles.
Characteristics of Exhaustion Gaps
- Indicate the end of a trend
- Signal weakening momentum
- Follow prolonged price moves
- Occur near major support/resistance
- Accompanied by high volume
Real Example of Exhaustion Gap
The chart below illustrates an exhaustion gap followed by a trend reversal on the US100 index (1-minute chart).
Comparing Price Gaps in Technical Analysis
Different types of price gaps convey insights into market direction, sentiment changes, support and resistancelevels, and volumeshifts. Interpreting each type depends on these contextualelements.
Key Notes on Using Price Gaps
Despite being easy to spot, the correct usage of types of gaps in trading requires trader skill. Misinterpretation can lead to missed opportunities or losses.
- Timing matters: Different gaps mean different things at various times;
- Strategic use: Gaps can serve as entry/exit signals;
- Volume relevance: Volume at the gap provides clues about strength and continuation;
- Type identification: Recognizing the type of gap is essential for technical analysis.
CME Gap in Cryptocurrency Markets
In crypto markets, the CME gap refers to the price difference between Bitcoin's close and open on the Chicago MercantileExchange (CME). These gaps usually occur because cryptoexchanges operate continuously, unlike the CME.
Crypto traders use the CME gap as a reference tool to assess potential price targets and entry and exitpoints.
Monday Opening Gaps
At the beginning of a new trading week, price gaps can form due to the release of macroeconomic news over the weekend.
These are often breakaway or continuation gaps, depending on the nature of the move.
Conclusion
Types of price gaps appear as gaps between candlesticks, providing various market insights based on timing and location. Traders use them for price analysis and to define entry and exit levels.
They reveal information on trend strength, market sentiment shifts, and key levels. In the cryptocurrency market, the CME gap has become a key tool for Bitcoin traders.
