In this section, you can see details about gap analysis which is used to identify the strength of current trend. There are four types of gap analysis – area gap, breakout gap, runaway gap and exhaustion gap.
Area gap – happens in the trading range(between demand and supply zone) or non-trending zone. This gap may get filled and the volume will be low. It could be due to global cues or market news.
Breakout gap – happens in trending zone seen after price breakout. It indicates start of new tread and this gap may not get filled in near term. Volume is expected to be high. It may be due to aggressive buying.
Runaway gap – seen after runaway gap and it happens in trending zone. It indicates short sellers are trying to cover their position and the volume is evenly distributed.
Exhaustion gap – a gap seen in trending zone, but the same is getting filled on the same day. It indicates the termination of current trend. Volume will be very high during exhaustion gap days.
Please ignore my first question. Please let me know who will use the gap analysis – weekly traders who do analysis with candlesticks or positional/swing traders who do analysis with price patterns like flag pattern, triangle, double top, and head & shoulder.
Hi,
You can build a trading strategy based on the type of gaps formed. If it’s a breakaway gap, it probably won’t be filled — at least, not in the near future. If it’s a common or runaway gap, it might get filled or it might not. Gap indicates only the strength & weakness of bulls and bears so you need to look at other indicators like price patterns & candlestick patterns to confirm the upcoming trend.